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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 33-60134
HOLLIS-EDEN PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 13-3697002
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(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
9333 GENESEE AVENUE, SUITE 200
SAN DIEGO, CA 92121
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (858) 587-9333
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common stock, $.01 par value per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934
during the preceding months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days.
YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of March 14, 2000 totaled approximately $132,546,608 based on
the closing stock price as reported by the Nasdaq National Market.
As of March 14, 2000, there were 11,201,786 shares of the Registrant's
Common Stock, $.01 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Registrant's Annual Report to Stockholders for the
fiscal year ended December 31, 1999, are incorporated by reference into Part
II of this report. Registrant's definitive proxy statement to be filed with
the Securities and Exchange Commission, pursuant to regulation 14A in
connection with the 2000 Annual Meeting of Stockholders to be held on June 23,
2000, is incorporated by reference into Part III of this Report.
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HOLLIS-EDEN PHARMACEUTICALS, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
INDEX
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PART I
Item 1 Business...................................................... 3
Item 2 Properties.................................................... 18
Item 3 Legal Proceedings............................................. 18
Item 4 Submission Of Matters To A Vote Of Security Holders........... 18
PART II
Market For Registrant's Common Stock And Related Stockholder
Item 5 Matters....................................................... 18
Item 6 Selected Financial Data....................................... 19
Item 7 Management's Discussion And Analysis Of Results Of Operations
And Financial Condition...................................... 19
Item 7A Quantitative and Qualitative Disclosures About Market Risk.... 22
Item 8 Financial Statements And Supplementary Data................... 22
Item 9 Changes In And Disagreements With Accountants On Accounting
And Financial Disclosures..................................... 22
PART III
Item 10 Directors And Executive Officers Of The Registrant............ 23
Item 11 Executive Compensation........................................ 23
Security Ownership Of Certain Beneficial Owners And
Item 12 Management.................................................... 23
Item 13 Certain Relationships And Related Transactions................ 23
PART IV
Exhibits, Financial Statements, Schedules And Reports On Form
Item 14 8-K........................................................... 24
Signatures.................................................... 25
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This Annual Report on Form 10-K contains certain forward-looking statements
that involve risks and uncertainties. The actual future results for Hollis-
Eden Pharmaceuticals, Inc. may differ materially from those discussed here.
Additional information concerning factors that could cause or contribute to
such differences can be found in this Annual Report on Form 10-K in Part I,
Item 1 under the caption "Risk Factors," Part II, Item 7 entitled
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and elsewhere throughout this Annual Report.
PART I
ITEM 1. BUSINESS
GENERAL
Hollis-Eden Pharmaceuticals, Inc., a development-stage pharmaceutical
company, is engaged in the discovery, development and commercialization of
products for the treatment of infectious diseases and immune system disorders,
including HIV/AIDS, hepatitis C and malaria.
We are focusing our initial development efforts on a potent series of
adrenal steroid hormone analogs. Our lead compound in this series, HE2000, is
currently in Phase I/II clinical studies in the U.S. and South Africa. By
altering cytokine production, HE2000 appears from early clinical studies to
help reestablish immune system balance in situations such as HIV where the
immune system is dysregulated. In the setting of HIV we believe that, by
reestablishing this balance, the immune system may be able to better control
virus levels and potentially delay or prevent the progression to AIDS. In
addition, based on the mechanism of action, we believe this compound will have
an attractive safety profile and will avoid issues of resistance that plague
many existing antiviral drugs.
The ability to restore immune system balance has the potential to have
broad applicability to a wide variety of infectious diseases and oncology-
related applications as well as a number of inflammatory conditions. To more
fully exploit this commercial opportunity we have begun an aggressive research
and licensing effort designed to expand both the number of compounds in
development and the breadth of potential therapeutic applications. Several
compounds resulting from these activities are in late stage preclinical
development and are candidates for clinical trials.
We are pursuing a partially integrated approach to building our business.
As such, we intend to utilize third parties for many of our activities such as
clinical development and manufacturing. We believe by being involved in the
design and supervision of these activities, but not the day-to-day execution,
we can preserve our flexibility and limit our net losses during the
development phase. If we are able to successfully develop HE2000 or other
pharmaceutical products, we anticipate marketing them directly in the U.S. and
potentially elsewhere. For certain therapeutic indications or geographic
regions, we anticipate establishing strategic collaborations to commercialize
these opportunities.
We have not yet generated any operating revenues. We have experienced
significant operating losses due to substantial expenses incurred to acquire
and fund development of our drug candidates and, as of December 31, 1999, had
an accumulated deficit of approximately $28.6 million. We cannot guarantee
that any of our drug candidates will be approved for commercial sale or that
any of the foregoing proposed arrangements will be implemented or prove to be
successful.
Hollis-Eden has been unprofitable since inception and expects to incur
substantial additional operating losses for at least the next few years as we
increase expenditures on research and development and begin to allocate
significant and increasing resources to our clinical testing and other
activities. In addition, during the next few years, we will have to meet the
substantial new challenge of developing the capability to market products.
Accordingly, our activities to date are not as broad in depth or scope as the
activities we must undertake in the future, and our historical operations and
financial information are not indicative of future operating or financial
condition or our ability to operate profitably as a commercial enterprise when
and if we succeed in bringing any drug candidate to market.
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TECHNOLOGY OVERVIEW
Our initial technology development efforts are focused on a series of
potent hormones and hormone analogs that we believe are key components of the
body's natural regulatory system. The first application we are pursuing for
this class of compounds is in reestablishing balance to the immune system in
situations of dysregulation.
In the immune system there are two types of immunity, cell-mediated and
humoral, that exist in a balance. Cell-mediated immunity is useful against
intracellular pathogens like viruses, certain parasites and also against some
tumor cells. Humoral immunity includes antibody responses to circulating
pathogens such as bacteria. As a result, cell-mediated parts are largely
ineffective against bacteria and humoral parts of the immune system are
similarly ineffective against viruses.
Normally, immune system homeostasis is maintained by a complex interplay of
cytokines. Cytokines are chemical messengers that enable cells of the immune
system to communicate with one another. Certain cytokines such as interferon
(IFN) gamma are termed Th1 cytokines, as they lead to the production of Th1
cells that fight viruses through cell-mediated immunity. Other cytokines such
as interleukin 10 (IL-10) are classified as Th2 cytokines because they lead to
the production of Th2 cells that fight bacteria and other such pathogens as
part of humoral immunity.
Unfortunately, a wide variety of viruses including HIV and hepatitis C,
certain parasites such as malaria, and a number of different tumor cells have
evolved ways of evading destruction by the immune system by causing the body
to overproduce Th2 cytokines and underproduce Th1 cytokines. This in turn
leads to a corresponding overproduction of cells unable to fight these
pathogens and an underproduction of cells that can.
Hollis-Eden's technology approach is based on the observation that this
complicated balance of cytokines is changed by competing levels of certain
adrenal steroid hormones. In young, healthy adults, the balance between
corticosteroids such as cortisol, which have immunosuppressive properties, and
other adrenal steroid hormones is a key determinant in whether appropriate
levels of cytokines are produced to properly regulate immune responses. As we
age and under conditions of stress, levels of these hormones that counteract
the immunosuppressive effect of corticosteroids fall significantly, leading to
a decline in the ability to fight off infections that would otherwise be
contained by a well functioning immune system.
As described above, certain pathogens have found ways to accelerate this
process as a means of survival. For example, in HIV, most patients' cortisol
levels rise and counter-regulatory adrenal hormones fall as the disease
progresses from HIV to AIDS. This then leads to a corresponding increase in
Th2 cytokines such as IL-10 relative to Th1 cytokines such as IFN gamma. As
this situation continues the immune system is dominated by Th2 cells unable to
fight viral and other infections rather than the necessary cell-mediated Th1
cells. In this state of immune system dysregulation, the patient becomes
highly susceptible to infection.
Certain patients, however, maintain their ability to continue to produce
high levels of Th1 cytokines and, in this small percentage of patients, HIV
appears to take much longer to progress to AIDS. These patients are termed HIV
long-term non-progressors. Similarly, in hepatitis C, a small percentage of
patients are able to mount a strong Th1 response and in these patients the
immune system is able to successfully clear the virus. These observations have
led to the belief that if patients can be brought from a Th2 predominant
immune status back towards a Th1 dominant condition through drug therapy, the
immune system may be able to contain or eliminate a number of such infectious
pathogens that are plaguing millions of people around the world. This Th1/Th2
imbalance is seen not just with infectious disease, but also in cancer,
autoimmune and inflammatory diseases and holds the potential to be applicable
to address a wide variety of human ailments if safe and effective therapies
that restore this balance can be found.
Our therapeutic approach is designed to interact at what is believed to be
the trigger point of this dysregulation, the hormonal balance between
corticosteroids and other adrenal steroids, offering a hormone replacement
therapy that potentially will lead to stimulation of the immune system in
conditions of immunosuppression.
In addition to the immunoregulatory properties described above, these
compounds have also shown significant direct antiviral properties in in vitro
tests. The mechanism of action in these studies is believed to be
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through the regulation of energy sources in the cell that viruses need to
replicate. These effects may contribute to potential benefits seen in early
clinical trials.
We are employing the latest tools of the genomics revolution to further our
expertise in steroid biochemistry, signal transduction, receptor biology and
gene transcription for this important class of compounds. We are seeking to
identify and develop compounds that are highly potent and devoid of androgenic
and other side effects. Our lead compound in this series is HE2000, which is
currently being explored in clinical trials in HIV/AIDS. Clinical trials with
HE2000 in hepatitis C, malaria and potentially other indications are planned
for the near future. In addition, we are also developing a number of candidate
compounds in this class, that also have potential in areas outside of
infectious disease.
HE2000 IN HIV
Significant strides have been made in recent years in treating HIV infected
individuals in the developed world. Through the use of a "cocktail" of potent
new antiviral drugs, including protease inhibitors and reverse transcriptase
inhibitors, death rates from AIDS have been reduced significantly in these
countries. These expensive new therapies, however, are not ideal for a number
of reasons. Despite being on successful therapy for several years, patients to
date have been unable to completely eradicate the virus, which bounces back
aggressively shortly after any cessation of therapy. HIV also multiplies
rapidly in the face of antiviral compounds that are designed to attack the
virus directly, leading to the development of resistance. Drug resistance is a
major concern of physicians, as a large portion of patients are already
resistant to at least one drug in their drug cocktail and these issues are
expected to increase.
In addition, the dosing regimen for this cocktail therapy is very
complicated, with a large number of pills being required to be taken daily
according to a strict schedule. Failure to adhere to this regimen can lead to
increased resistance. Further, side effects of these therapies can be
significant, leading to a percentage of these patients being unable or
unwilling to tolerate the drug regimen.
In the developing world, the cocktail has been impractical as a result of
the cost and the difficulty complying with the dosing regimen. Furthermore,
the failure to adhere to the complicated schedule could potentially lead to
massive resistance issues.
Hollis-Eden believes HE2000 has the potential to play an important role in
treating HIV/AIDS in both the developed and developing world. In the developed
world we believe that, if we can demonstrate clinically that HE2000 restores
or improves immune system activity, there may be a number of significant
opportunities for use of the compound. It may be useful for long-term control
of viral replication as well as delaying or preventing the progression to AIDS
and preventing or clearing opportunistic infections. At a minimum, this could
prove very useful in treating patients who cannot tolerate other therapies and
in salvage patients who are resistant to antiviral drug cocktail therapy. In
addition, there is interest in the clinical community in exploring the
potential of HE2000 to upregulate the immune system during periods of
antiviral drug cocktail holidays.
In the developing world, HE2000 may be particularly attractive because we
believe the drug will be administered on an intermittent basis rather than
everyday, will have a lower manufacturing cost than existing therapies, and,
given its probable endocrine mechanism of action, should avoid issues of
resistance.
We began testing HE2000 in Phase I/II clinical trials in HIV/AIDS patients
in the U.S. and South Africa in 1999. Although primarily designed to assess
safety, these trials are also following a wide variety of immune markers that
will help determine whether or not the Th1/Th2 balance is being altered in
HIV-infected patients by HE2000 administration, and what effect this in turn
may have on immune function. The U.S. trials involve a single course of HE2000
injections to salvage patients, for whom other drug therapies have failed and
whose immune systems have generally been ravaged by HIV.
Additional information may be gained in the trial underway in South Africa,
where multiple rounds of HE2000 are being given to subjects who have never
undergone antiviral therapy. The protocol for the South African subjects
includes a single intramuscular injection, followed by a 1- to 2-week
observation period to check
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for adverse reactions. Afterwards, the subjects receive five daily injections
in a row, followed by a 4- to 6- week observation period--and, for those
patients who appear to be benefiting from treatment, up to six more cycles of
injections and observation.
Preliminary data from a group of patients from the South African clinical
trial indicates that the drug to date appears to be safe with no drug-related
serious adverse events being reported. Given the mechanism of action we
believe to be important for HE2000, one of the goals of the trial was to
ascertain whether the compound could restore immune balance by shifting the
cytokine pattern back to a Th1 state. In this initial group of patients, those
that were producing an excess of Th2 cytokines appeared to convert back after
therapy to a state in which Th1 cytokines predominated.
This in turn led to an activation of a number of cell types potentially
important for fighting infection such as T cells, LAK cells, natural killer
cells and dendritic cells. The degree of activation was significant and
prolonged, indicating an upregulation of the immune system. Normally these
cells decrease prior to onset of AIDS. We believe that these results are
encouraging regarding the ability of the compound to prevent or treat
opportunistic infections and potentially provide long term control of viral
load set point.
We are currently optimizing the dosing regimen and preparing to initiate
pilot clinical studies with the compound in South African AIDS patients who
are experiencing, or are at risk of, opportunistic infections. We are also
considering several clinical trials in which HE2000 would be used in
combination with existing antiviral drug cocktail therapy.
Significant additional clinical data will need to be generated
demonstrating the safety and efficacy of HE2000 before the compound can be
approved for marketing. There can be no assurance that we will have sufficient
funds to complete this development or that the results of these clinical
activities will be successful.
HE2000 IN OTHER INDICATIONS
The potential ability of HE2000 to shift patients from a Th2 immune status
back to a Th1 status has applications well beyond HIV/AIDS. As mentioned
previously, in hepatitis C, a small percentage of patients are able to resolve
the virus by mounting a strong cell-mediated (Th1) response. Given the early
clinical data with HE2000, which demonstrates a strong Th1 response in HIV
patients, we are exploring the initiation of clinical studies in hepatitis C.
Existing therapies for hepatitis C have proven to be effective in only a
portion of the patients treated. In addition, side effects of these existing
therapies can be significant and the regimen is very expensive. As with HIV,
resistance is a serious problem in treating the disease. Also as with HIV,
cost and other aspects of existing therapies make them largely impractical in
the developing world.
Similarly, malarial parasites have found ways to subvert the immune system
by causing a shift from Th1 to Th2. Historically, therapy with quinalone-based
drugs such as chloroquine have been used to treat this condition. Recently,
however, strains have developed that are resistant to chloroquine and other
quinalones making these drugs ineffective in many parts of the world.
We have shown in both in vitro and in vivo preclinical studies that HE2000
is effective in treating both chloroquine sensitive and chloroquine resistant
strains of malaria. We are working with the U.S. Navy to further test HE2000
preclinically in this indication and are also preparing to begin pilot
clinical trials in this area.
OTHER ADRENAL STEROID HORMONES IN DEVELOPMENT
To expand the depth and breadth of our development pipeline, we have
entered into collaborative agreements with a number of leading researchers in
this field to develop additional compounds, which may be more potent and/or
target conditions outside of infectious disease. In addition, we have licensed
a large number of patents and patent applications filed on behalf of these
inventors. A number of the compounds covered by these patents have
demonstrated potent activity in a variety of indications including
applications in oncology, inflammation and certain central nervous system and
metabolic disorders.
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EDENLAND COMPOUNDS
We have recently restructured our agreement with Patrick Prendergast and
Edenland Inc. (See "Technology Agreements"). Under this agreement, we have
licensed rights to a series of patents and patent applications for compounds
outside of the adrenal hormone series and are sponsoring additional research
at Edenland related to these compounds.
One of the compounds included in this license is HE317, which is being
developed in preclinical models to stimulate the immune system in situations
of immunosuppression. HE317 is also a candidate for clinical development
subject to the successful completion of further preclinical studies and scale
up of manufacturing.
MARKET OPPORTUNITIES
The potential market opportunities for the compounds we are developing are
quite significant. Disease prevalence for the three initial indications we are
pursuing is described below.
Despite considerable progress with antiviral drug cocktail therapy, AIDS
today is the number one killer of Americans between the ages of 25 and 44. It
is estimated by the Centers for Disease Control that approximately 1.1 million
Americans are infected with HIV. Globally, the World Health Organization
("WHO") and the Joint United Nations Programme on HIV/AIDS reported, as of
December 1998, that approximately 33.4 million adults and children are living
with HIV/AIDS, a 10% increase from 1997. It is also estimated that there were
5.8 million newly infected people and 2.5 million deaths related to HIV/AIDS
in 1998.
WHO also reports that there are an estimated 170 million chronic carriers
of hepatitis C in the world, including an estimated 4 million in the U.S. Of
those afflicted with hepatitis C, 20% are at risk of developing cirrhosis of
the liver and 1% to 5% may develop liver cancer.
Market research also indicates that 300-500 million people per year suffer
from malaria. The parasite is responsible for more than one million deaths
annually, most of them children. Most cases of malaria occur in the developing
world but, as a result of increased global travel and other factors, the
incidence of malaria in the developed world is increasing. Finding new
approaches to the treatment of malaria has become a major priority of the U.S.
military.
HE2000 and other compounds in this class we are developing have a number of
attributes that make them potentially useful globally. Included in these
attributes are potential broad-spectrum activity, the attractive safety
profile to date, the low likelihood of resistance and the relative ease of
manufacture and dosing. Increasing focus on the crisis these diseases have
created in the developing world has led to a number of recent initiatives
designed to provide funding for effective approaches to these diseases. If we
are able to receive support from these initiatives, marketing HE2000 and our
other compounds in developing countries could become more commercially
feasible.
COMPETITION
Given the large market opportunities we are pursuing, most major
pharmaceutical companies and a number of biotechnology companies have programs
directed toward finding drugs to treat indications we are exploring. Most of
these approaches in infectious disease are targeted at creating new antiviral
compounds rather than drugs that upregulate the immune system. As such, they
will be expected to have different profiles than our compounds and may be
complementary to our efforts.
There can be no assurance, however, that other companies will not develop
drugs that make our development efforts obsolete. Many of these competitors
have substantially greater human and financial resources than we do and, even
if we are successful at developing our compounds, others with greater
resources may be able to market their products more successfully.
RESEARCH AND DEVELOPMENT EXPENSES
In 1999, 1998 and 1997, our research and development expenses were $5.7
million, $2.8 million and $3.5 million respectively. For further information
about our research and development expenses, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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FDA OVERVIEW
GENERAL
The manufacturing and marketing of Hollis-Eden's proposed products and its
research and development activities are and will continue to be subject to
regulation by federal, state and local governmental authorities in the United
States and other countries. In the United States, pharmaceuticals are subject
to rigorous regulation by the FDA's Center for Drug Evaluation and Research,
which reviews and approves the marketing of drugs. The Federal Food, Drug and
Cosmetic Act, the regulations promulgated thereunder, and other federal and
state statutes and regulations govern, among other things, the testing,
manufacturing, labeling, storage, record keeping, advertising and promotion of
our potential products.
APPROVAL PROCESS
The process of obtaining FDA approval for a new drug may take several years
and generally involves the expenditure of substantial resources. Hollis-Eden
will try to accelerate the drug approval process because of the priority
status of HIV/AIDS drugs. See "Accelerated Drug Approval". The steps required
before a new drug can be produced and marketed for human use include clinical
trials and the approval of a New Drug Application.
Preclinical Testing. The promising compound is subjected to extensive
laboratory and animal testing to determine if the compound is biologically
active and safe.
Investigational New Drug (IND). Before human tests can start, the drug
sponsor must file an IND application with the FDA, showing how the drug is
made and the results of animal testing. If the FDA does not reject the
application within 30 days, IND status allows initiation of clinical
investigation.
Human Testing (Clinical). The human clinical testing program usually
involves three phases which generally are conducted sequentially, but which,
particularly in the case of anti-cancer and other life saving drugs, may
overlap or be combined. Clinical trials are conducted in accordance with
protocols that detail the objectives of the study, the parameters to be used
to monitor safety and the efficacy criteria to be evaluated. Each protocol is
submitted to the FDA as part of the IND filing. Each clinical study is
conducted under the auspices of an independent Institutional Review Board
("IRB") for each institution at which the study will be conducted. The IRB
will consider, among other things, all existing pharmacology and toxicology
information on the product, ethical factors, the risk to human subjects and
the potential benefits of therapy relative to risk.
In Phase I clinical trials, studies usually are conducted on healthy
volunteers but, in the case of certain terminal illnesses such as AIDS, are
conducted on patients with disease that usually has failed to respond to other
treatment to determine the maximum tolerated dose, side effects and
pharmacokinetics of a product. Phase II studies are conducted on a small
number of patients having a specific disease to determine initial efficacy in
humans for that specific disease, the most effective doses and schedules of
administration, and possible adverse effects and safety risks. Phase II/III
differs from Phase II in that the trials involved may include more patients
and, at the sole discretion of the FDA, be considered the pivotal trial or
trials for FDA approval (see below). Phase III normally involves the pivotal
trials of a drug, consisting of wide-scale studies on patients with the same
disease, in order to evaluate the overall benefits and risks of the drug for
the treated disease compared with other available therapies. The FDA
continually reviews the clinical trial plans and results and may suggest
design changes or may discontinue the trials at any time if significant safety
or other issues arise.
New Drug Application (NDA). Upon completion of Phase III, the drug sponsor
must file an NDA containing all information that has been gathered. The
information must include the chemical composition of the drug, scientific
rationale, purpose, animal and laboratory studies, results of human tests,
formation and production details, and proposed labeling.
Approval. Once an NDA is approved, the drug sponsor is required to submit
reports periodically to the FDA containing adverse reactions, production,
quality control and distribution records. The FDA may also
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require post-marketing testing to support the conclusion of efficacy and
safety of the product, which can involve significant expense. After FDA
approval is obtained for initial indications, further clinical trials may be
necessary to gain approval for the use of the product for additional
indications.
The testing and approval process is likely to require substantial time and
effort, and there can be no assurance that any FDA approval will be granted on
a timely basis, if at all. The approval process is affected by a number of
factors, primarily the side effects of the drug (safety) and its therapeutic
benefits (efficacy). Additional preclinical or clinical trials may be required
during the FDA review period and may delay marketing approval. The FDA may
also deny an NDA if applicable regulatory criteria are not met.
Outside the United States, Hollis-Eden will be subject to foreign
regulatory requirements governing human clinical trials and marketing approval
for its products. The requirements governing the conduct of clinical trials,
product licensing, pricing and reimbursements vary widely from country to
country.
ACCELERATED DRUG APPROVAL
In December 1992, the FDA formalized procedures for accelerating the
approval of drugs to be marketed for the treatment of certain serious
diseases. To be eligible for this program, the products must treat serious or
life-threatening illnesses and provide meaningful therapeutic benefits beyond
existing treatments. Under these regulations, a significant new therapy could
be approved for marketing at the earliest possible point at which safety and
effectiveness are reasonably established under existing law. For example, the
approval of a drug could be accelerated by demonstrating a favorable effect on
a well-documented surrogate endpoint to predict clinical benefit, instead of
requiring that the drug demonstrate actual clinical benefit.
An important and unique element of these regulations is that approval would
be granted only if the sponsor agrees to conduct additional post-marketing
studies to confirm the product's effectiveness and/or agrees to restrict
distribution of the product. In addition, if the further clinical trials do
not bear out the product's effectiveness or if restricted distribution is
inadequate to assure safe use, approval of the product would be withdrawn. We
cannot be certain that any of our drug candidates will receive accelerated
treatment.
MANUFACTURING
Hollis-Eden does not have, and does not intend to establish, manufacturing
facilities to produce its products. We plan to control our capital
expenditures by using contract manufacturers to make our products. We believe
that there are a sufficient number of high quality FDA approved contract
manufacturers available, and we have had discussions and established
relationships with several of them, to fulfill our near-term production needs
for both clinical and commercial use.
The manufacture of our products, whether done by outside contractors (as
planned) or in house by ourselves, will be subject to rigorous regulations,
including the need to comply with the FDA's current Good Manufacturing
Practice standards. As part of obtaining FDA approval for each product, each
of the manufacturing facilities must be inspected, approved by and registered
with the FDA. In addition to obtaining FDA approval of the prospective
manufacturer's quality control and manufacturing procedures, domestic and
foreign manufacturing facilities are subject to periodic inspection by the FDA
and/or foreign regulatory authorities.
PATENTS
Hollis-Eden considers the protection of its products, whether owned or
licensed, to the exclusion of use by others, to be vital to its business.
While we intend to focus primarily on patented or patentable technology, we
may also rely on trade secrets, unpatented property, know-how, regulatory
exclusivity, patent extensions and continuing technological innovation to
develop our competitive position. In the United States and certain foreign
countries, the exclusivity period provided by patents covering pharmaceutical
products may be extended by a portion of the time required to obtain
regulatory approval for a product.
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In certain countries, pharmaceuticals are not patentable or only recently
have become patentable, and enforcement of intellectual property rights in
many countries has been limited or non-existent. Future enforcement of patents
and proprietary rights in many countries can be expected to be problematic or
unpredictable. There can be no assurance that any patents issued or licensed
to Hollis-Eden will provide us with competitive advantages or will not be
challenged by others. Furthermore, there can be no assurance that others will
not independently develop similar products or will not design around patents
issued or licensed to us.
Patent applications in the United States are maintained in secrecy until
patents issue. Publication of discoveries in the scientific or patent
literature, if made, tends to lag behind actual discoveries by several months.
Consequently, we cannot be certain that a licensor of its intellectual
property was the first to invent certain technology or compounds covered by
pending patent applications or issued patents or that it was the first to file
patent applications for such inventions. In addition, the patent positions of
pharmaceutical companies, including those of Hollis-Eden, are generally
uncertain, partly because they involve complex legal and factual questions.
In addition to the considerations discussed above, companies that obtain
patents claiming products, uses or processes that are necessary for or useful
to the development of Hollis-Eden's products could bring legal actions against
us claiming infringement. Patent litigation is typically costly and time-
consuming, and if such an action were brought against us, it could result in
significant cost and diversion of our time. We may be required to obtain
licenses to other patents or proprietary rights, and there can be no assurance
that licenses would be made available on terms acceptable to the Company. If
Hollis-Eden does not obtain such licenses, it could encounter delays in
product market introductions while we attempt to license technology designed
around such patents or could find that the development, manufacture or sale of
products requiring such licenses is foreclosed.
Further, there can be no assurance that patents that are issued will not be
challenged, invalidated or infringed upon or designed around by others, or
that the claims contained in such patents will not infringe the patent claims
of others, or provide Hollis-Eden with significant protection against
competitive products, or otherwise be commercially valuable. We may need to
acquire licenses under patents belonging to others for technology potentially
useful or necessary to us or, if any such licenses are required, that they
will be available on terms acceptable to us, if at all. To the extent that we
are unable to obtain patent protection for our products or technology, Hollis-
Eden's business may be adversely affected by competitors who develop
substantially equivalent technology.
TECHNOLOGY AGREEMENTS
During January 2000, Hollis-Eden entered into two new technology agreements
with Patrick T. Prendergast, Colthurst Ltd. and Edenland, Inc. The first
agreement, the Technology Assignment Agreement, replaces the Colthurst License
Agreement dated May 18, 1994 among Hollis-Eden, Mr. Prendergast and Colthurst.
This agreement assigns to Hollis-Eden ownership of all patents, patent
applications and current or future improvements of the technology under the
Colthurst License Agreement, including HE2000, Hollis-Eden's lead clinical
compound. The annual license fee of $500,000 and the royalty obligations under
the Colthurst License Agreement have been eliminated. In consideration for the
foregoing, Hollis-Eden agreed to issue to Colthurst Ltd. 660,000 shares of
Common Stock and a warrant to purchase an aggregate of 400,000 shares of
Common Stock at $25 per share. Only 132,000 of such shares of Common Stock
will be issued in 2000, with the remaining 528,000 shares to be issued over
the next four years conditioned on continued compliance with the agreement. In
addition, all of the shares under the warrant will vest over the next four
years conditioned on continued compliance with the agreement.
The second agreement, the Sponsored Research and License Agreement,
replaces both the Edenland License Agreement and the Research, Development and
Option Agreement, each dated August 25, 1994 among Hollis-Eden, Mr.
Prendergast and Edenland. Pursuant to the Sponsored Research and License
Agreement, Edenland exclusively licensed to Hollis-Eden a number of compounds,
together with all related patents and patent applications, and Hollis-Eden
agreed to fund additional pre-clinical research projects conducted by
Edenland. Hollis-Eden will also have exclusive license rights to all results
of such research and will have royalty obligations to Edenland on sales of new
products, if any, resulting from such research.
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We also recently entered into license agreements with Dr. Roger Loria, Dr.
Henry Lardy and Humanetics Corporation, in which we have licensed a series of
adrenal hormones and hormone analogs as well as related patents and patent
applications in the areas of infectious diseases, oncology, radiation therapy,
central nervous system disorders, metabolic conditions and inflammation
related areas.
EMPLOYEES
As of March 1, 2000, the Company had 25 full-time employees. The Company
believes that its relations with its employees are good.
EXECUTIVE OFFICERS AND SENIOR MANAGEMENT
The executive officers and senior management of the Company and their ages
as of March 15, 2000 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Richard B. Hollis.............. 47 Chairman of the Board, President and Chief Executive Officer
Daniel D. Burgess.............. 38 Chief Operating Officer and Chief Financial Officer
James M. Frincke, Ph.D. ....... 49 Executive Vice President, Research and Development
Candice Byrne.................. 46 Vice President, Human Resources
Eric J. Loumeau................ 37 Vice President, Corporate General Counsel
Robert L. Marsella............. 47 Vice President, Business Development and Marketing
Thomas C. Merigan, Jr., M.D. .. 66 Chairman of the Scientific Advisory Board
Chris Reading, Ph.D. .......... 52 Vice President, Scientific Department
Robert W. Weber................ 49 Chief Accounting Officer and Vice President - Controller
</TABLE>
RICHARD B. HOLLIS founded Hollis-Eden in August 1994. Mr. Hollis currently
serves as Chairman, President and Chief Executive Officer. Mr. Hollis has over
20 years experience in the health care industry in a variety of senior
management positions. Prior to founding Hollis-Eden Mr. Hollis served as Chief
Operating Officer of Bioject Medical from 1991 to 1994 and as Vice President
Marketing and Sales/General Manager for Instromedix from 1989 to 1991. From
1986 to 1989, Mr. Hollis served as a general manager of the Western business
unit of Genentech, Inc., a manufacturer of biopharmaceuticals. Prior to
joining Genentech, Inc., Mr. Hollis served as a divisional manager of Imed
Corporation, Inc., a manufacturer of drug delivery systems. Mr. Hollis began
his career in the health care industry with Baxter Travenol. Mr. Hollis
received his B.A. in Psychology from San Francisco State University.
DANIEL D. BURGESS became Chief Operating Officer and Chief Financial
Officer of Hollis-Eden Pharmaceuticals, Inc. in August 1999. Mr. Burgess
joined Hollis-Eden from Nanogen Inc., where he served as Vice President and
Chief Financial Officer. Prior to joining Nanogen, Mr. Burgess spent ten years
with Gensia Sicor, Inc. (now Sicor, Inc.) and Gensia Automedics, Inc., a
partially owned subsidiary of Gensia Sicor. He served as President and a
director of Gensia Automedics, where he was responsible for all functional
areas of this medical products company. In addition, he was Vice President and
Chief Financial Officer of Gensia Sicor, where he was responsible for finance,
investor relations, business development and other administrative functions.
Mr. Burgess was instrumental in helping Gensia raise over $400 million in
various public and private financings and was a key figure in a number of
acquisitions and in-licensing and out-licensing transactions. Prior to joining
Gensia, Mr. Burgess held positions at Castle & Cooke, Inc. and Smith Barney,
Harris Upham and Company. He received a degree in Economics from Stanford
University and a MBA from Harvard Business School.
JAMES M. FRINCKE, PH.D. joined Hollis-Eden as Vice President, Research and
Development in November 1997 and was promoted to Executive Vice President in
March 1999. During his 16 years in the biotechnology industry, Dr. Frincke has
managed major development programs including drugs, biologicals, and cellular
and gene therapy products aimed at the treatment of cancer, infectious
diseases and organ transplantation. Since
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joining the biotechnology industry, Dr. Frincke has held vice president,
research and development positions in top tier biotechnology companies
including Hybritech/Eli Lilly and SyStemix (acquired by Novartis). In various
capacities, he has been responsible for all aspects of pharmaceutical
development including early stage research programs, product evaluation,
pharmacology, manufacturing, and the management of regulatory and clinical
matters of lead product opportunities. Dr. Frincke has authored or co-authored
more than 100 scientific articles, abstracts and regulatory filings. Dr.
Frincke received his B.S. in Chemistry and his Ph.D. in Chemistry, from the
University of California, Davis. Dr. Frincke completed his postdoctoral work
at the University of California, San Diego.
CANDICE BYRNE became Vice President of Human Resources in March 1999. Ms.
Byrne brings extensive experience in business, manpower planning,
organizational development and process improvement to Hollis-Eden. Prior to
joining Hollis-Eden, she served as Vice President of Human Resources in Baxter
International Inc.'s Cardiovascular Surgery group. At Baxter, she provided
human resources leadership for business acquisitions and divestitures,
strategic evaluations of human resource potential and long-range development
opportunities. She was also instrumental in integrating acquired companies
into the parent company. Ms. Byrne has spent more than 20 years of her career
in human resources for medical and technology companies, including American
Hospital Supply Corporation and Partners National Health Plans. She earned her
B.A. in Fine Arts at the University of Arizona and Masters Degree in
Organizational Management at the University of Phoenix.
ERIC J. LOUMEAU became Vice President/Corporate General Counsel in
September 1999. Mr. Loumeau came to Hollis-Eden from the law firm of Cooley
Godward LLP, where he had primary responsibility for the Hollis-Eden account
for four years. As a partner at Cooley Godward, Mr. Loumeau represented a
number of private and public companies in corporate and securities law
matters. Prior to joining Cooley Godward in 1995, Mr. Loumeau was an associate
for four years at the law firm of Skadden, Arps, Slate, Meagher and Flom.
Mr. Loumeau attended Harvard Law School and the University of California,
Berkeley Boalt Hall School of Law, where he received a J.D.degree. He holds a
B.S. degree in Business Administration with an emphasis in finance from
Brigham Young University.
ROBERT L. MARSELLA joined Hollis-Eden in September 1997 as Vice President
of Business Development and Marketing. Mr. Marsella has over 19 years of
medical sales, marketing, and distribution experience. From 1994 until he
joined Hollis-Eden, Mr. Marsella was President of RLM Cardiac Products an
exclusive distributor in the southwestern United States of various cardiac
related hospital products. From 1990 until 1994 Mr. Marsella marketed and
distributed implantable pacemakers and defibrillators for Telectronics Pacing
Systems. From 1987 to 1990 Mr. Marsella served as Regional Manager for
Genentech and launched ACTIVASE t-PATM (a biopharmaceutical drug) in the
Western United States. From 1983-1987 Mr. Marsella marketed intravenous
infusion pumps for Imed Corporation. Mr. Marsella began his career in 1980, as
a field sales representative and later regional sales manager for U.S.
Surgical Corporation, auto suture division. Mr. Marsella received his B.A.
degree from San Diego State University in 1975
THOMAS C. MERIGAN, JR., M.D. became Chairman of the Scientific Advisory
Board and a director of Hollis-Eden in March 1996 and acts as the Company's
Medical Director. Dr. Merigan has been George E. and Lucy Becker Professor of
Medicine at Stanford University School of Medicine from 1980 to the present.
Dr. Merigan has also been the Principal Investigator, NIAID Sponsored AIDS
Clinical Trials Unit, from 1986 to the present and has been Director of
Stanford University's Center For AIDS Research from 1988 to the present. Dr.
Merigan is a member of various medical and honorary societies, has lectured
extensively within and outside the United States, and authored numerous books
and articles and has chaired and edited symposia relating to viruses,
infectious diseases, anti-viral agents, HIV and other retroviruses and AIDS.
From 1990 to the present, Dr. Merigan has been Chairman, Editorial Board of
"HIV: Advances in Research and Therapy". He is also a member of the editorial
boards of " Aids Research and Human Retroviruses" (since 1983), "International
Journal of Anti-Microbial Agents" (since 1990), and "The Aids Reader" (since
1991), among others. He is a co-recipient of eight patents which, among other
things, relate to synthetic polynucleotides, modification of hepatitis B virus
infection, treatment of HIV infection, purified cytomegalovirus protein and
composition and treatment for herpes simplex. Dr. Merigan has been Chair,
Immunology Advisory Board, Bristol Myers Squibb
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Corporation (1989-1995) and Chair, Scientific Advisory Board, Sequel Corp.
(1993-1996). In 1994, Stanford University School of Medicine honored him with
the establishment of the Annual Thomas C. Merigan Jr. Endowed Lectureship in
Infectious Diseases, and, in 1996, Dr. Merigan was elected Fellow, American
Association for the Advancement of Science. From 1966 to 1992, Dr. Merigan was
Head, Division of Infectious Diseases, at Stanford School of Medicine. Dr.
Merigan received his B.A. (with honors) from the University of California at
Berkeley and his M.D. from the University of California at San Francisco.
CHRIS READING, PH.D. became Vice President of Scientific Development in
January 1999. Prior to joining Hollis-Eden, Dr. Reading was Vice President of
Product and Process Development at Novartis Inc.-owned, SyStemix Inc. During
this time, he successfully filed three investigational new drug applications
(INDs) in the areas of stem cell therapy technology and stem cell gene therapy
for HIV/AIDS. Prior to joining SyStemix, Dr. Reading served on the faculty of
the M.D. Anderson Cancer Center in Houston for nearly 13 years. His positions
there included Associate and Assistant Professor of Medicine in the
Departments of Hematology and Tumor Biology. During his career, Dr. Reading
has given more than 25 national and international scientific presentations,
published more than 50 peer-reviewed journal articles and 15 invited journal
articles as well as written nearly 20 book chapters, and has received numerous
grants and contracts which supported his research activities. Dr. Reading has
served on the National Science Foundation Advisory Committee for Small
Business Innovative Research Grants (SBIR) as well as on the editorial boards
of Journal of Biological Response Modifiers and Molecular Biotherapy. He holds
numerous patents for his work with monoclonal antibodies and devices. He
earned his B.A. in Biology at the University of California at San Diego. Dr.
Reading received his Ph.D. in Biochemistry at the University of California at
Berkeley and completed postdoctoral study in tumor biology at The University
of California at Irvine.
ROBERT W. WEBER joined Hollis-Eden in March 1996 and currently serves as
Chief Accounting Officer and Vice President-Controller. Mr. Weber has over
twenty years of experience in financial management. Mr. Weber has been
employed at executive levels by multiple start-up companies and contributed to
the success of several turnaround situations. Most recently he served as Vice
President of Finance at Prometheus Products, a subsidiary of Sierra
Semiconductor, and Vice President Finance and Chief Financial Officer for
Amercom, (a personal computer telecommunications software publishing company).
From February 1988 to August 1993, Mr. Weber served as Vice President Finance
and Chief Financial Officer of Instromedix, a company which develops and
markets medical devices and software. Mr. Weber brings a broad and expert
knowledge of many aspects of financial management. In various capacities, he
has been responsible for all aspects of finance and accounting including cost
accounting, cash management, SEC filings, investor relations, private and
venture financing, corporate legal matters, acquisitions/divestitures as well
as information services and computer automation. Mr. Weber received a B.S.
from GMI Institute of Technology and a MBA from the Stanford Graduate School
of Business.
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RISK FACTORS
An investment in Hollis-Eden shares involves a high degree of risk. You
should consider the following discussion of risks, in addition to other
information contained in this Annual Report on Form 10-K.
IF WE DO NOT OBTAIN FDA REGULATORY APPROVAL FOR OUR PRODUCTS, WE CANNOT SELL
OUR PRODUCTS AND WE WILL NOT GENERATE REVENUES.
Our principle development efforts are currently centered around HE2000, a
drug candidate which we believe shows promise for the treatment and prevention
of HIV/AIDS. However, all drug candidates require Food and Drug
Administration, FDA, and foreign government approvals before they can be
commercialized. Neither HE2000 nor any of our other drug candidates have been
approved for commercial sale. We expect to incur significant additional
operating losses over the next several years as we fund development, clinical
testing and other expenses while seeking regulatory approval. While limited
clinical trials of HE2000 have to date produced favorable results, significant
additional trials are required, and we may not be able to demonstrate that
this drug candidate is safe or effective. We cannot guarantee that any of our
product candidates will obtain required government approval. If we do not
receive FDA or foreign approvals for our products, we will not be able to sell
our products and will not generate revenues.
IF WE DO NOT SUCCESSFULLY COMMERCIALIZE OUR PRODUCTS, WE MAY NEVER ACHIEVE
PROFITABILITY.
We have experienced significant operating losses to date because of the
substantial expenses we have incurred to acquire and fund development of our
drug candidates. We have never had operating revenues and have never
commercially introduced a product. Our accumulated deficit was $28.6 million
through December 31, 1999. Many of our research and development programs are
at an early stage. Potential drug candidates are subject to inherent risks of
failure. These risks include the possibilities that no drug candidate will be
found safe or effective, meet applicable regulatory standards or receive the
necessary regulatory clearances. Even safe and effective drug candidates may
never be developed into commercially successful drugs. If we are unable to
develop safe, commercially viable drugs, we may never achieve profitability.
AS A RESULT OF OUR INTENSELY COMPETITIVE INDUSTRY, WE MAY NOT GAIN ENOUGH
MARKET SHARE TO BE PROFITABLE.
The biotechnology and pharmaceutical industries are intensely competitive.
We have numerous competitors in the United States and elsewhere. Our
competitors include major, multinational pharmaceutical and chemical
companies, specialized biotechnology firms and universities and other research
institutions. Many of these competitors have greater financial and other
resources, larger research and development staffs and more effective marketing
and manufacturing organizations than we do. In addition, academic and
government institutions have become increasingly aware of the commercial value
of their research findings. These institutions are now more likely to enter
into exclusive licensing agreements with commercial enterprises, including our
competitors, to market commercial products.
Our competitors may succeed in developing or licensing technologies and
drugs that are more effective or less costly than any we are developing. Our
competitors may succeed in obtaining FDA or other regulatory approvals for
drug candidates before we do. We cannot guarantee that our drug candidates, if
approved for sale, will be able to compete successfully with our competitors'
existing products under development. If we are unable to compete successfully,
we may never be able to sell enough products at a sufficient price that would
generate profits.
OUR FAILURE TO PROTECT OUR PROPRIETARY TECHNOLOGY COULD IMPAIR OUR COMPETITIVE
POSITION.
We have developed and licensed numerous issued patents and pending
applications in the U.S. and foreign counterparts. Our success will depend in
part on our ability to obtain additional United States and foreign patent
protection for our drug candidates and processes, preserve our trade secrets
and operate without infringing the proprietary rights of third parties. We
place considerable importance on obtaining patent protection for significant
new technologies, products and processes. Legal standards relating to the
validity of patents covering
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pharmaceutical and biotechnology inventions and the scope of claims made under
such patents are still developing. Our patent position is highly uncertain and
involves complex legal and factual questions. We cannot be certain that the
applicant or inventors of subject matter covered by patent applications or
patents owned by or licensed to us were the first to invent or the first to
file patent applications for such inventions. We cannot guarantee that any
patents will issue from any of the pending or future patent applications we
own or have licensed. Existing or future patents owned by or licensed to us
may be challenged, infringed upon, invalidated, found to be unenforceable or
circumvented by others. Further, we cannot guarantee that any rights we may
have under any issued patents will provide us with sufficient protection
against competitive products or otherwise cover commercially valuable products
or processes.
If another party claims the same subject matter or subject matter
overlapping with the subject matter that we have claimed in a United States
patent application or patent, we may decide or be required to participate in
interference proceedings in the United States Patent and Trademark Office in
order to determine the priority of invention. Loss of such an interference
proceeding would deprive us of patent protection sought or previously obtained
and could prevent us from commercializing our products. Participation in such
proceedings could result in substantial costs, whether or not the eventual
outcome is favorable. These additional costs could adversely affect our
ability to achieve profitability.
WE WILL NEED TO RAISE ADDITIONAL MONEY BEFORE WE EXPECT TO ACHIEVE
PROFITABILITY; IF WE FAIL TO RAISE ADDITIONAL MONEY, IT WOULD BE DIFFICULT TO
CONTINUE OUR BUSINESS.
As of December 31, 1999 our cash and cash equivalents totaled approximately
$47 million. We believe these financial resources will fund our opportunities
well into 2001. Once these current financial resources run out, we will
require substantial additional funds in order to finance our drug discovery
and development programs, fund operating expenses, pursue regulatory
clearances, develop manufacturing, marketing and sales capabilities, and
prosecute and defend our intellectual property rights. We intend to seek
additional funding through public or private financing or through
collaboration arrangements with collaborative partners. If we can not raise
additional funds when needed, we may not be able to continue to develop our
products, which would prevent us from generating revenues.
IF WE RAISE ADDITIONAL MONEY BY ISSUING EQUITY SECURITIES, YOUR INVESTMENT
WILL BE DILUTED.
If we raise additional funding by issuing more equity securities, the new
shares will dilute the voting power of your investment on a percentage basis.
THE TECHNOLOGY IN OUR SECTOR IS DEVELOPING RAPIDLY, AND OUR FUTURE DEPENDS ON
OUR ABILITY TO KEEP ABREAST OF TECHNOLOGICAL CHANGE.
Biotechnology and related pharmaceutical technology have undergone rapid
and significant change. We expect that the technologies associated with
biotechnology research and development will continue to develop rapidly. Our
future will depend in large part on our ability to maintain a competitive
position with respect to these technologies. Any compounds, products or
processes that we develop may become obsolete before we recover any expenses
we have incurred in connection with developing these products. If we fail to
recover our expenses because our products become obsolete, we may not be able
to achieve profitability.
IF THE MANUFACTURERS OF OUR PRODUCTS DO NOT COMPLY WITH FDA REGULATIONS, OR
CANNOT PRODUCE THE AMOUNT OF PRODUCTS WE NEED TO CONTINUE OUR DEVELOPMENT, WE
WILL FALL BEHIND ON OUR BUSINESS OBJECTIVES.
Outside manufacturers currently produce our drug candidates. Manufacturers
producing our products must follow current Good Manufacturing Practices
regulations enforced by the FDA through its facilities inspection program. If
a manufacturer of our products does not conform to the Good Manufacturing
Practices regulations and cannot be brought up to such a standard, we will be
required to find alternative manufacturers that do conform. This may be a long
and difficult process, and may delay our ability to receive FDA approval of
our products.
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We also rely on our manufacturers to supply us with a sufficient quantity
of our drug candidates to conduct clinical trials. If we have difficulty in
the future obtaining our required quantity and quality of supply, we could
experience significant delays in our development programs and regulatory
process.
IF WE DECIDE TO MANUFACTURE OUR PRODUCTS OURSELVES, WE FACE FURTHER FDA
REGULATION AND WILL REQUIRE ADDITIONAL CAPITAL.
At this time, we do not intend to manufacture any pharmaceutical products
ourselves. If we decide to manufacture products ourselves in the future, we
would be subject to the same risks associated with the regulatory requirements
described above. We would also require substantial additional capital. We have
no experience manufacturing pharmaceutical products for commercial purposes,
so we cannot guarantee that we would be able to manufacture any products
successfully or in a cost-effective manner.
OUR ABILITY TO ACHIEVE ANY SIGNIFICANT REVENUE WILL DEPEND ON OUR ABILITY TO
ESTABLISH EFFECTIVE SALES AND MARKETING CAPABILITIES.
Our efforts to date have focused on the development and evaluation of our
drug candidates. As we continue clinical studies and prepare for
commercialization of our drug candidates, we need to build a sales and
marketing infrastructure. We have no experience in the sales and marketing of
our drug candidates. If we fail to establish a sufficient marketing and sales
force, it will impair our ability to enter new or existing markets. Our
inability to effectively enter these markets would materially and adversely
affect our ability to generate significant revenues.
IF HOLLIS-EDEN WERE TO LOSE THE SERVICES OF RICHARD B. HOLLIS, OR FAIL TO
ATTRACT QUALIFIED PERSONNEL IN THE FUTURE, OUR BUSINESS OBJECTIVES WOULD BE
MORE DIFFICULT TO IMPLEMENT, ADVERSELY AFFECTING OUR OPERATIONS.
Our ability to successfully implement our business strategy depends highly
upon our Chief Executive Officer, Richard B. Hollis. The loss of Mr. Hollis's
services could impede the achievement of our research and development
objectives. We also highly depend on our ability to hire and retain qualified
scientific and technical personnel. The competition for these employees is
intense. We cannot guarantee that we will continue to be able to hire and
retain the qualified personnel needed for our business. Loss of the services
of or the failure to recruit key scientific and technical personnel could
adversely affect our business, operating results and financial condition.
WE MAY FACE PRODUCT LIABILITY CLAIMS RELATED TO THE USE OR MISUSE OF OUR
PRODUCTS WHICH MAY CAUSE US TO INCUR SIGNIFICANT LOSSES.
We face inherent business risk of product liability claims in the event
that the use or misuse of our products results in personal injury or death. We
have not experienced any such claims to date, but we cannot be certain, in
particular after commercial introduction of our products, that we will not
experience losses due to product liability claims. We currently maintain
liability insurance on a claims-made basis. We cannot be certain that the
insurance policies' coverage limits are adequate. The insurance is expensive,
difficult to obtain and may not be available in the future on acceptable
terms, or at all. Any claims against us, regardless of their merit, could
substantially increase our costs and cause us to incur significant losses.
TRADING IN OUR SHARES COULD BE SUBJECT TO EXTREME PRICE FLUCTUATIONS WHICH
COULD ADVERSELY AFFECT YOUR INVESTMENT.
The market prices for securities of life sciences companies, particularly
those that are not profitable, have been highly volatile, especially recently.
Publicized events and announcements may have a significant impact on the
market price of our common stock. For example, biological or medical
discoveries by competitors, unfavorable results from clinical trials,
unfavorable developments concerning patents or other proprietary rights or
unfavorable domestic or foreign regulatory developments may have the effect of
temporarily or permanently driving down the price of our common stock
(example: Hollis-Eden's stock price has ranged from $8.63 to $25.50 from
January 1, 1999 to December 31, 1999.) In addition, the stock market from time
to time experiences
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extreme price and volume fluctuations which particularly affect the market
prices for emerging and life sciences companies, such as ours, and which are
often unrelated to the operating performance of the affected companies. These
broad market fluctuations may adversely affect the ability of a stockholder to
dispose of his shares at a price equal to or above the price at which the
shares were purchased.
BECAUSE STOCK OWNERSHIP IS CONCENTRATED, YOU AND OTHER INVESTORS WILL HAVE
MINIMAL INFLUENCE ON STOCKHOLDERS DECISIONS.
Assuming that outstanding warrants and options have not been exercised,
Richard B. Hollis, our Chief Executive Officer, owns approximately 26% of our
outstanding common stock. Assuming the exercise of our outstanding warrants
and options, Mr. Hollis would own approximately 20% of our outstanding common
stock. As a result, Mr. Hollis may be able to significantly influence the
management of Hollis-Eden and all matters requiring stockholder approval,
including the election of directors. Such concentration of ownership may also
have the effect of delaying or preventing a change in control of Hollis-Eden.
WE HAVE IMPLEMENTED ANTI-TAKEOVER PROVISIONS, ANY OF WHICH MAY REDUCE THE
MARKET PRICE OF OUR COMMON STOCK.
Provisions of our certificate of incorporation and bylaws could make it
more difficult for a third party to acquire us, even if the acquisition would
be beneficial to our stockholders.
Our board of directors is authorized, without any further vote by
stockholders, to issue shares of preferred stock. The issuance of preferred
stock with special voting, liquidation and dividend privileges may have the
effect of delaying, deferring or preventing a change in control without any
further action by the stockholders. Any such issuance may materially and
adversely affect the price of the common stock.
Our board of directors is a "classified board," with approximately one-
third of our directors elected each year. Two annual meetings would be
necessary to change a majority of the directors as a result of having a
classified board. The existence of a classified board may, in certain
circumstances, deter or delay mergers, tender offers, other possible takeover
attempts or changes in management of the board of directors which may be
favored by some or a majority of our stockholders.
We have distributed a dividend of one right for each outstanding share of
common stock pursuant to the terms of our stockholder rights plan. These
rights will cause substantial dilution to the ownership of a person or group
that attempts to acquire us on terms not approved by our board of directors
and may have the effect of deterring hostile takeover attempts.
IF WE FAIL TO ADEQUATELY ADDRESS YEAR 2000 PROBLEMS, OUR BUSINESS AND
FINANCIAL CONDITION COULD EXPERIENCE LOSSES.
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. Beginning in the year
2000, these date code fields needed to accept four-digit entries to
distinguish the 21st century dates from 20th century dates. The effects of the
Year 2000 issue may be experienced after January 1, 2000, and if not
addressed, the impact on operations may affect an entity's ability to conduct
normal business operations. Three months into the year 2000, we have not
identified any Year 2000 problems internally and we have not experienced
problems with our suppliers relating to Year 2000 issues. However, it is
possible that such problems may occur or be discovered later. Accordingly, it
is not possible to be certain that all aspects of the Year 2000 issue
affecting Hollis-Eden, including those relating to our suppliers or other
third parties, are fully resolved. Should any adverse consequences occur, it
could affect our drug development process and clinical trials. We may also
incur certain unexpected costs in connection with the Year 2000 issue.
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ITEM 2. PROPERTIES
The Company's corporate headquarters are located at 9333 Genesee Avenue,
Suites 110 and 200, San Diego, California 92121, where the Company leases
approximately 17,000 square feet. The leases expire in August 2000 and August
2002, respectively. The Company believes that its facilities are adequate for
its current operations.
ITEM 3. LEGAL PROCEEDINGS
On November 8, 1999, Hollis-Eden filed two separate requests for
arbitration with one of its licensors, Patrick T. Prendergast, together with
two entities he is affiliated with, Colthurst Ltd. and Edenland, Inc. The
first arbitration sought clarification of certain operational issues with
respect to roles and responsibilities set forth in the Colthurst License
Agreement covering HE2000. The second arbitration sought rescission of both
the Edenland License Agreement and the Research, Development and Option
Agreement with Edenland covering future potential drug candidates other than
HE2000 (the "Edenland Agreements"). In this arbitration, the Company alleged
that the Edenland Agreements should be rescinded based on, among other things,
non-performance on the part of Edenland.
On January 20, 2000, Hollis-Eden reached a settlement on its pending
arbitration with Patrick T. Prendergast, Colthurst Ltd. and Edenland, Inc. The
Settlement and Mutual Release Agreement completely disposes of all of the
matters that were at issue in the pending arbitration. In addition, the
parties entered into two new technology agreements, the Technology Assignment
Agreement and the Sponsored Research and License Agreement (See Item 1--
Business-Technology Agreements).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the Nasdaq National Market System
under the symbol HEPH.
The following table sets forth the quarterly high and low bid quotations
and/or selling prices for the securities of the Company during the last two
fiscal years.
<TABLE>
<CAPTION>
COMMON STOCK HIGH LOW
------------ ------- -------
<S> <C> <C>
1998
First Quarter.............................................. $19.750 $ 6.125
Second Quarter............................................. 18.000 14.000
Third Quarter.............................................. 16.938 7.875
Fourth Quarter............................................. 18.500 10.094
1999
First Quarter.............................................. $25.500 $13.250
Second Quarter............................................. 18.750 10.000
Third Quarter.............................................. 16.000 11.000
Fourth Quarter............................................. 18.625 8.625
</TABLE>
On March 14, 2000, the closing price of the Company's common stock as
reported by the Nasdaq National Market System was $16.00 per share. There were
approximately 5,000 shareholders of record plus beneficial stockholders of the
Company's common stock as of such date. The Company has not paid cash
dividends on its common stock and does not intend to do so in the foreseeable
future.
18
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following data summarizes certain selected financial data for each of
the five years ended December 31, 1999 and the period from inception (August
15, 1994) to December 31, 1999. The information presented should be read in
conjunction with the financial statements and related notes included elsewhere
in this report.
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER PERIOD FROM
31, INCEPTION
($000'S), EXCEPT PER SHARE (AUG. 15, 1994)
-------------------------------------------- TO DECEMBER 31,
1999 1998 1997 1996 1995 1999
------- ------- ------ ------ ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Research and
development........... $ 5,731 $ 2,777 $3,488 $ 184 $ 463 $13,811
General and
administrative........ 11,940 (1) 3,577 2,044 511 171 18,346
------- ------- ------ ------ ------- -------
Total operating
expenses.............. 17,671 6,355 5,532 695 634 32,157
Other income
(expense)............. 2,351 927 280 3 (38) 3,516
------- ------- ------ ------ ------- -------
Net loss............... $15,320 $ 5,427 $5,253 $ 692 $ 672 $28,641
======= ======= ====== ====== ======= =======
Net loss per share,
basic and diluted..... $ (1.41) $ (0.69) $(0.85) $(0.15) $ (0.17)
Weighted average number
of common shares
outstanding........... 10,861 7,851 6,193 4,658 3,868
BALANCE SHEET DATA:
Cash and equivalents... $47,486 $24,190 $7,103 $ 18 $ --
Total assets........... 48,265 24,524 7,400 241 --
Accounts payable and
accrued expenses...... 1,640 222 467 807 1,296
Stockholders' equity
(deficit)............. $46,625 $24,303 $6,933 $ (566) $(1,538)
</TABLE>
- --------
(1) 1999 General and Administrative expenses include $7.7 million for non-cash
charges, due to the acceleration of vesting of stock options for a former
officer, the issuance of warrants for services, and the issuance of stock
options to non-employees.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
The forward-looking comments contained in the following discussion involve
risks and uncertainties. The Company's actual results may differ materially
from those discussed here. Factors that could cause or contribute to such
differences can be found in the following discussion and elsewhere throughout
this Annual Report on Form 10-K.
GENERAL
Hollis-Eden Pharmaceuticals, Inc., a development-stage pharmaceutical
company is engaged in the discovery, development and commercialization of
products for the treatment of infectious diseases and immune system disorders,
including HIV/AIDS, hepatitis C, and malaria.
We are focusing our initial development efforts on a potent series of
adrenal steroid hormone analogs. Our lead compound in this series, HE2000, is
currently in Phase I/II clinical studies in the U.S. and South Africa. By
altering cytokine production HE2000 appears from early clinical studies to
help reestablish immune system balance in situations such as HIV where the
immune system is dysregulated. In the setting of HIV we believe that by
reestablishing this balance the immune system may be able to better control
virus levels and potentially delay or prevent the progression to AIDS. In
addition, based on the mechanism of action, we believe these compounds will
have an attractive safety profile and will avoid issues of resistance that
plague many existing antiviral drugs.
19
<PAGE>
Hollis-Eden has been unprofitable since inception and expects to incur
substantial additional operating losses for at least the next few years as it
increases expenditures on research and development and begins to allocate
significant and increasing resources to clinical testing and other activities.
In addition, during the next few years, we will have to meet the substantial
new challenge of developing the capability to market products. Accordingly,
our activities to date are not as broad in depth or scope as the activities we
must undertake in the future, and Hollis-Eden's historical operations and
financial information are not indicative of the future operating results or
financial condition or ability to operate profitably as a commercial
enterprise when and if we succeed in bringing any drug candidates to market.
On March 26, 1997, Hollis-Eden, Inc., a Delaware corporation, was merged
with and into the Company (then known as Initial Acquisition Corp. ("IAC")), a
Delaware corporation, pursuant to an Agreement and Plan of Merger, dated
November 1, 1996, (the "Merger Agreement"). Upon consummation of the merger of
Hollis-Eden, Inc. with IAC (the "Merger"), Hollis-Eden, Inc. ceased to exist,
and IAC changed its name to Hollis-Eden Pharmaceuticals, Inc.
RESULTS OF OPERATIONS
We have not generated any revenues for the period from August 15, 1994
(inception of Hollis-Eden) through December 31, 1999. We have devoted
substantially all of our resources to the payment of licensing fees and
research and development fees plus expenses related to the startup of our
business. From inception until December 31, 1999, we have incurred expenses of
approximately $13.8 million in research and development fees and $18.3 million
in general and administrative expenses, which have been partially offset by
$3.5 million in net interest income resulting in a loss of $28.6 million for
the period.
Research and development expenses were $5.7 million, $2.8 million and $3.5
million in 1999, 1998 and 1997, respectively. 1999 and 1998 research and
development expenses relate primarily to the ongoing development, preclinical
testing, and clinical trials for our first drug candidate, HE2000. The
increase in research and development expenses in 1999 as compared to 1998 was
due to increased staffing, preclinical activity, and the initiation of
clinical trials. A substantial portion of the 1997 research and development
expenses were incurred after the completion of the Merger during March 1997 as
described below.
General and administrative expenses increased to $11.9 million in 1999 from
$3.6 million and $2.0 million in 1998 and 1997, respectively. The 1999 general
and administrative expenses included (i) $7.7 million for non-cash charges,
due to the acceleration of vesting of stock options for Hollis-Eden's former
officer, the issuance of warrants for services (described below), and the
issuance of stock options to non-employees, (ii) increased staffing, and (iii)
increased operating expenses for salaries, benefits, recruiting, legal, and
travel. The increases in 1998 as compared to 1997 are due primarily to (i) the
amortization of the unearned compensation charge of certain stock options
(described below), (ii) increased expenses as a public company such as legal
fees, filing fees, and directors and officers insurance, and (iii) increased
staffing.
During 1999, we announced the resignation of our president and accelerated
the vesting of 300,000 stock options previously granted to him. This
acceleration is considered to be a new grant of options and therefore we
expensed a one time non-cash charge of $4.9 million. We also entered into a
three-year agreement with a financial consulting organization affiliated with
a director of Hollis-Eden. We agreed to issue, as compensation for services,
warrants to purchase 500,000 shares of Common Stock with an exercise price of
$20.50 per share. The warrants were estimated to have a value of approximately
$2.1 million, which was expensed as a non-cash charge.
In 1998, we incurred significant general and administrative non-cash, non-
recurring charges. A total of $716,000 was amortized throughout 1998 for
services in lieu of cash and non-cash compensation. Additionally, $240,000 was
expensed for options granted to certain directors and consultants.
20
<PAGE>
Upon the completion of the Merger and the exercise of warrants, Hollis-Eden
incurred significant non-recurring charges to operations that have been
recorded as expenses during 1997. In particular, we incurred (i) a $1.5
million and a $1.2 million expense for research and development fees during
the first and second quarters, respectively, and (ii) a $570,000 non-cash
charge relating to the issuance of warrants to a certain director and former
officer during the first quarter.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception through the sale of shares
of Common Stock and with loans from the Company's founder, Richard B. Hollis.
We repaid Mr. Hollis in January 1996.
During the year ended December 31, 1995, we received cash proceeds of
$250,000 from the sale of securities. In May 1996, we completed a private
placement of shares of Common Stock, from which we received aggregate gross
proceeds of $1.3 million. In March 1997, the Merger of IAC and Hollis-Eden ,
Inc. provided us with $6.5 million in cash and other receivables. In May 1998,
we completed a private placement of shares and warrants, from which we
received gross proceeds of $20 million. During January 1999, we completed two
private placements raising approximately $25 million. In addition, Hollis-Eden
has received a total of $12.2 million from the exercise of warrants and stock
options.
Under our previous license agreements with Patrick T. Prendergast,
Colthurst and Edenland, we were obligated to pay certain minimum license fees
to maintain our rights to the drug candidates. An annual renewable license fee
of $500,000 was due and paid in May 1999. As of December 31, 1999, we were
current on all license fee obligations under these agreements.
Under our previous Research and Development Agreement with Edenland and
Patrick T. Prendergast, we committed to pay $3.0 million for certain
development costs. These development costs were accrued as an expense during
1997 and paid in full by April 1998.
During January 2000, we were assigned all patents, patent applications and
current or future improvements to the technology under the Colthurst License
Agreement, including HE2000, in exchange for equity in Hollis-Eden. In
addition, we entered into a new license agreement with Edenland and terminated
the existing agreements with Mr. Prendergast, Colthurst and Edenland (see Item
1--Business-Technology Agreements).
Hollis-Eden's operations to date have consumed substantial capital without
generating any revenues, and we will continue to require substantial and
increasing amounts of funds to conduct necessary research and development and
preclinical and clinical testing of our drug candidates, and to market any
drug candidates that receive regulatory approval. We do not expect to generate
revenue from operations for the foreseeable future, and our ability to meet
our cash obligations as they become due and payable is expected to depend for
at least the next several years on our ability to sell securities, borrow
funds or some combination thereof. Based upon our current plans, we believe
that our existing capital resources, together with interest thereon, will be
sufficient to meet our operating expenses and capital requirements well into
2001. However, changes in our research and development plans or other events
affecting our operating expenses may result in the expenditure of such cash
before that time. We may not be successful in raising necessary funds. Our
future capital requirements will depend upon many factors, including progress
with preclinical testing and clinical trials, the number and breadth of our
programs, the time and costs involved in preparing, filing, prosecuting,
maintaining and enforcing patent claims and other proprietary rights, the time
and costs involved in obtaining regulatory approvals, competing technological
and market developments, and our ability to establish collaborative
arrangements, effective commercialization, marketing activities and other
arrangements. We expect to continue to incur increasing negative cash flows
and net losses for the foreseeable future.
YEAR 2000
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. Beginning in the year
2000, these date code fields needed to accept four-digit entries to
21
<PAGE>
distinguish the 21st century dates from 20th century dates. The effects of the
Year 2000 issue may be experienced after January 1, 2000, and if not
addressed, the impact on operations and affect an entity's ability to conduct
normal business operations. Three months into the year 2000, we have not
identified any Year 2000 problems internally and we have not experienced
problems with our suppliers relating to Year 2000 issues. However, it is
possible that such problems may occur or be discovered later. Accordingly, it
is not possible to be certain that all aspects of the Year 2000 issue
affecting Hollis-Eden, including those relating to our suppliers or other
third parties, are fully resolved. Should any adverse consequences occur, it
could affect our drug development process and clinical trials. We may also
incur certain unexpected costs in connection with the Year 2000 issue.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is provided in a separate section
beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
22
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See the section entitled "Executive Officers and Senior Management" in Part
I, Item 1 hereof for information regarding executive officers and senior
management.
The information required by this item with respect to directors is
incorporated by reference from the information under the heading "Election of
Directors," contained in Hollis-Eden's definitive Proxy Statement to be filed
with the Commission pursuant to Regulation 14A in connection with the 2000
Annual Meeting (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information concerning executive compensation is set forth in the Proxy
Statement under the heading "Executive Compensation," which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning security ownership of certain beneficial owners
and management is set forth in the Proxy Statement under the heading "Security
Ownership of Certain Beneficial Owners and Management," which information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning certain relationships and related transactions
is set forth in the Proxy Statement under the heading "Certain Transactions,"
which information is incorporated herein by reference.
23
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this Annual Report to Stockholders
on Form 10-K:
1. Financial Statements: The financial statements of Hollis-Eden
Pharmaceuticals are included as Appendix F of this report. See Index
to Financial Statements on page F-1.
2. Financial Statement Schedules: Financial statement schedules
required under the related instructions are not applicable for the
three years ended December 31, 1999, and have therefore been
omitted.
3. Exhibits: The exhibits which are filed with this Report or which are
incorporated herein by reference are set forth in the Exhibit Index
on page E-1.
(b) Reports on Form 8-K
On November 24, 1999, a report on Form 8-K dated November 15, 1999 was
filed with the SEC announcing the approval of a Share Purchase Rights Plan
effective November 29, 1999.
On November 30, 1999, a report on Form 8-K dated November 8, 1999 was filed
with the SEC announcing that the Company had filed two separate requests for
arbitration with one of its licensors, Patrick T. Prendergast, together with
two entities he is affiliated with, Colthurst Ltd. and Edenland, Inc.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on March 17, 2000
HOLLIS-EDEN PHARMACEUTICALS, INC.
By:/s/ Richard B. Hollis
----------------------------------
RICHARD B. HOLLIS,
CHAIRMAN OF THE BOARD OF DIRECTORS,
AND CHIEF EXECUTIVE OFFICER
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints RICHARD B. HOLLIS, DANIEL D. BURGESS
and ROBERT W. WEBER, and each of them, as his true and lawful attorneys-in-
fact and agents, with full power of substitution and resubstitution, for him
and in his name, place, and stead, in any and all capacities, to sign any and
all amendments to this Report, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in connection therewith, as fully to
all intents and purposes as he might or could do in person, hereby ratifying
and confirming that all said attorneys-in-fact and agents, or any of them or
their or his substitute or substituted, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Richard B. Hollis Chairman of the Board of March 17, 2000
____________________________________ Directors, President and
RICHARD B. HOLLIS Chief Executive Officer
/s/ Daniel D. Burgess Chief Operating March 17, 2000
____________________________________ Officer/Chief Financial
DANIEL D. BURGESS Officer (Principal Financial
Officer)
/s/ Robert W. Weber Chief Accounting Officer and March 17, 2000
____________________________________ Vice President - Controller
ROBERT W. WEBER (Principal Accounting
Officer)
/s/ Paul Bagley Director March 13, 2000
____________________________________
PAUL BAGLEY
/s/ Leonard Makowka Director March 13, 2000
____________________________________
LEONARD MAKOWKA
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Brendan R. McDonnell Director March 13, 2000
____________________________________
BRENDAN R. MCDONNELL
/s/ Thomas C. Merigan, Jr. M.D. Chairman of the Scientific March 13, 2000
____________________________________ Advisory Board and Director
THOMAS C. MERIGAN, JR. M.D.
/s/ William H. Tilley Director March 13, 2000
____________________________________
WILLIAM H. TILLEY
/s/ Salvatore J. Zizza Director March 13, 2000
____________________________________
SALVATORE J. ZIZZA
</TABLE>
26
<PAGE>
APPENDIX E
HOLLIS-EDEN PHARMACEUTICALS, INC.
ANNUAL REPORT ON FORM 10-K
----------------
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF THE DOCUMENT
------- ----------------------------------------------------------------------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 4.1 to Registrant's Registration
Statement on Form S-4 (No. 333-18725), as amended (the "Form S-4" )).
3.2 Bylaws of Registrant (incorporated by reference to Exhibit 4.2 to the
Form S-4).
3.3 Certificate of Designation of Series B Junior Participating Preferred
Stock (incorporated by reference to Exhibit 4.1 to Registrant's
Current Report on Form 8-K dated November 15, 1999).
*10.1 Registrant's 1997 Incentive Stock Option Plan (the "Option Plan")
(incorporated by reference to Exhibit 10.3 to the Form S-4).
*10.2 Forms of Incentive Stock Options and Nonstatutory Stock Options under
the Option Plan. (incorporated by reference to Exhibit 10.5 to the
Form S-4).
*10.3 Employment Agreement by and between Registrant and Richard B. Hollis
dated November 1, 1996 (incorporated by reference to Exhibit 10.6 to
the Form S-4).
*10.4 Employment Agreement by and between Registrant and Robert W. Weber
dated March 16, 1996 (incorporated by reference to Exhibit 10.9 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1998).
*10.5 Consulting Agreement and Warrant by and between Registrant and William
H. Tilley and Jacmar/Viking L.L.C. dated March 8, 1999.
*10.6 Separation and Mutual Release Agreement by and between Registrant and
Terren S. Peizer effective as of February 25, 1999 (incorporated by
reference to Exhibit 10.10 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999).
*10.7 Employment Agreement by and between Registrant and Daniel D. Burgess
dated July 9, 1999 (incorporated by reference to Exhibit 10.10 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999).
*10.8 Employment Agreement by and between Registrant and Eric J. Loumeau
dated September 15, 1999 (incorporated by reference to Exhibit 10.10
to Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999).
10.9 Settlement and Mutual Release Agreement, dated January 20, 2000, among
Registrant, Colthurst Limited, Edenland, Inc. and Patrick T.
Prendergast (incorporated by reference to Exhibit 99.2 to Registrant's
Current Report on Form 8-K dated January 20, 2000).
10.10 Technology Assignment Agreement, dated January 20, 2000, among
Registrant, Colthurst Limited and Patrick T. Prendergast (incorporated
by reference to Exhibit 99.3 to Registrant's Current Report on Form 8-
K dated January 20, 2000).
10.11 Common Stock and Warrant Agreement, dated January 20, 2000, among
Registrant and Colthurst Limited (incorporated by reference to Exhibit
99.4 to Registrant's Current Report on Form 8-K dated January 20,
2000).
</TABLE>
E-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF THE DOCUMENT
------- ----------------------------------------------------------------------
<C> <S>
10.12 Warrant, dated January 20, 2000, issued to Colthurst Limited
(incorporated by reference to Exhibit 99.5 to Registrant's Current
Report on Form 8-K dated January 20, 2000).
10.13 Sponsored Research and License Agreement, dated January 20, 2000,
among Registrant, Edenland, Inc., Colthurst Limited and Patrick T.
Prendergast (incorporated by reference to Exhibit 99.6 to Registrant's
Current Report on Form 8-K dated January 20, 2000).
23.1 Consent of BDO Seidman, LLP.
24.1 Power of Attorney. Reference is made to signature page.
27 Financial Data Schedule (filed electronically only).
</TABLE>
- --------
* Management contract or compensatory plan, contract or arrangement to be
filed as an Exhibit pursuant to Item 14(c) of Form 10-K.
E-2
<PAGE>
APPENDIX F
HOLLIS-EDEN PHARMACEUTICALS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants....................... F-2
Balance Sheets as of December 31, 1999 and 1998.......................... F-3
Statements of Operations for the Fiscal Years Ended December 31,1999,
December 31, 1998, December 31, 1997 and the Period From Inception
(August 15, 1994) to December 31, 1999.................................. F-4
Statements of Stockholders' Equity for the Fiscal Years Ended December
31, 1995, December 31, 1996, December 31, 1997, December 31 1998,
December 31, 1999 and the Period from Inception (August 15, 1994) to
December 31, 1994....................................................... F-5
Statements of Cash Flows for the Fiscal Years Ended December 31, 1999,
December 31 1998, December 31, 1997 and the Period from Inception
(August 15, 1994) to December 31, 1999.................................. F-6
Notes to Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Hollis-Eden Pharmaceuticals, Inc.
San Diego, CA
We have audited the accompanying balance sheets of Hollis-Eden
Pharmaceuticals, Inc. (a development stage company) as of December 31, 1999
and 1998 and the related statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1999
and for the period from inception (August 15, 1994) to December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly
in all material respects, the financial position of Hollis-Eden
Pharmaceuticals, Inc. as of December 31, 1999 and 1998 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999 and for the period from inception (August 15, 1994) to
December 31, 1999, in conformity with generally accepted accounting
principles.
BDO Seidman, LLP
New York, NY
January 21, 2000
F-2
<PAGE>
HOLLIS-EDEN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents............................ $47,486,163 $24,189,806
Prepaid expenses..................................... 114,987 26,250
Deposits............................................. 27,185 9,163
----------- -----------
Total current assets................................. 47,628,335 24,225,219
Property and equipment, net of accumulated
depreciation of $96,538 and $28,201................. 391,869 92,343
Receivable from related party (Note 6)............... 244,667 206,663
----------- -----------
Total assets..................................... $48,264,871 $24,524,225
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Account payable and accrued expenses................. $ 1,640,226 $ 221,670
----------- -----------
Total current liabilities............................ 1,640,226 221,670
Commitments and contingencies (see Note 9, 14, 15)
Stockholders' equity: (Notes 3, 4, 5, 8, 10, 11, 12,
13)
Preferred stock, convertible into common stock,
$.01 par value, 10,000,000 shares authorized; 0
and 4,000 shares issued or outstanding,
respectively...................................... -- 40
Common stock, $.01 par value, 30,000,000 shares
authorized; 11,071,054 and 8,592,202 shares issued
and outstanding, respectively..................... 110,710 85,922
Paid-in capital.................................... 75,155,266 38,795,887
Deferred compensation-stock options, net of
accumulated amortization of $641,333 and $590,000,
respectively...................................... -- (1,258,000)
Deficit accumulated during development stage....... (28,641,331) (13,321,294)
----------- -----------
Total stockholders' equity....................... 46,624,645 24,302,555
----------- -----------
Total liabilities and stockholders' equity....... $48,264,871 $24,524,225
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
HOLLIS-EDEN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(AUG.15,1994)
TO
FOR THE YEAR ENDED DECEMBER 31, DECEMBER 31,
----------------------------------- -------------
1999 1998 1997 1999
----------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Operating expenses:
Research and development... $ 5,730,833 $2,777,460 $3,488,358 $13,810,689
General and administrative:
General and administrative
operating expenses....... 4,279,388 2,621,183 1,184,115 8,863,696
G&A costs related to
options/warrants
granted.................. 7,660,482 956,000 860,024 9,482,523
----------- ---------- ---------- -----------
Total general and
administrative......... 11,939,870 3,577,183 2,044,139 18,346,219
Total operating
expenses............... 17,670,703 6,354,643 5,532,497 32,156,908
Other income (expense):
Interest income............. 2,350,666 928,916 279,812 3,565,126
Interest expense............ -- (1,726) (199) (49,549)
----------- ---------- ---------- -----------
Total other income.......... 2,350,666 927,190 279,613 3,515,577
----------- ---------- ---------- -----------
Net loss.................... $15,320,037 $5,427,453 $5,252,884 $28,641,331
=========== ========== ========== ===========
Net loss per share, basic
and diluted................ $ (1.41) $ (0.69) $ (0.85)
Weighted average number of
common shares outstanding.. 10,860,666 7,850,854 6,192,764
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
HOLLIS-EDEN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED DEFICIT
STOCK AT PAR COMMON STOCK ACCUMULATED
VALUE AT PAR VALUE CAPITAL IN DURING
-------------- ------------------- EXCESS OF DEFERRED DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT PAR VALUE COMPENSATION STAGE TOTAL
------ ------ ---------- -------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Contribution by
stockholder............. -- $-- -- $ -- $ 103,564 $ -- $ -- $ 103,564
Common stock issued for
cash.................... -- -- 2,852,830 285 24,715 -- -- 25,000
Common stock issued as
consideration for the
license agreements (Note
9)...................... -- -- 543,396 55 4,707 -- -- 4,762
Net loss................ -- -- -- -- -- -- (1,277,046) (1,277,046)
------ ---- ---------- -------- ----------- ---------- ------------ -----------
Balance at December 31,
1994.................... -- -- 3,396,226 340 132,986 -- (1,277,046) (1,143,720)
Common stock issued for
cash.................... -- -- 679,245 68 249,932 -- -- 250,000
Common stock issued as
consideration for
amendments to the
license agreements (Note
9)...................... -- -- 75,472 7 27,771 -- -- 27,778
Net loss................ -- -- -- -- -- -- (671,691) (671,691)
Balance at December 31,
1995.................... -- -- 4,150,943 415 410,689 -- (1,948,737) (1,537,633)
Common stock issued in
conversion of debt (Note
11)..................... -- -- 164,962 16 371,148 -- -- 371,164
Common stock issued for
cash, net of issuance
costs of $203,622 (Note
11)..................... -- -- 580,005 58 1,234,441 -- -- 1,234,499
Common stock issued as
consideration for
termination of a finance
agreement............... -- -- 15,094 2 33,960 -- -- 33,962
Warrants issued to
consultants for services
rendered................ -- -- -- -- 24,069 -- -- 24,069
Net loss................ -- -- -- -- -- -- (692,220) (692,220)
------ ---- ---------- -------- ----------- ---------- ------------ -----------
Balance at December 31,
1996.................... -- -- 4,911,004 491 2,074,307 -- (2,640,957) (566,159)
Recapitalization of
Company upon the merger
with Initial Acquisition
Corp. (Note 3).......... -- -- 883,250 57,453 6,213,329 -- -- 6,270,782
Warrants issued to a
certain director upon
the successful closure
of the merger........... -- -- -- -- 570,000 -- -- 570,000
Exercise of warrants,
net of expenses (Note
4)...................... -- -- 977,593 9,775 5,619,330 -- -- 5,629,105
Deferred compensation--
stock options (Note
13)..................... -- -- -- -- 1,848,000 (1,848,000) -- --
Amortization of deferred
compensation............ -- -- -- -- -- 282,000 -- 282,000
Exercise of stock
options................. -- -- 166 1 372 -- -- 373
Net loss................ -- -- -- -- -- -- (5,252,884) (5,252,884)
------ ---- ---------- -------- ----------- ---------- ------------ -----------
Balance at December 31,
1997.................... -- -- 6,772,013 67,720 16,325,338 (1,566,000) (7,893,841) 6,933,217
Exercise of warrants.... -- -- 398,359 3,984 1,195,728 -- -- 1,199,712
Exercise of stock
options................. -- -- 53,302 533 155,717 -- -- 156,250
Private Placement, net
of expenses (Note 11)... 4,000 40 1,329,201 13,292 19,876,497 -- -- 19,889,829
Warrants issued for
services in lieu of cash
(Note 10)............... -- -- -- -- 408,000 -- -- 408,000
Stock issued for license
fee (Note 9)............ -- -- 33,058 330 499,670 -- -- 500,000
Stock issued for
services in lieu of
cash.................... -- -- 6,269 63 94,937 -- -- 95,000
Options issued for
services in lieu of cash
(Note 13)............... -- -- -- -- 240,000 -- -- 240,000
Amortization of deferred
compensation............ -- -- -- -- -- 308,000 -- 308,000
Net loss................ -- -- -- -- -- -- (5,427,453) (5,427,453)
------ ---- ---------- -------- ----------- ---------- ------------ -----------
Balance at December 31,
1998.................... 4,000 40 8,592,202 85,922 38,795,887 (1,258,000) (13,321,294) 24,302,555
Exercise of warrants.... -- -- 755,423 7,554 5,136,614 -- -- 5,144,168
Exercise of stock
options................. -- -- 9,434 94 74,906 -- -- 75,000
Private Placement, net
of expenses (Note 5).... -- -- 1,367,868 13,679 24,758,827 -- -- 24,772,506
Preferred Stock
Conversion(Note 11,12).. (4,000) (40) 346,127 3,461 (3,421) -- -- --
Deferred compensation-
Options forfeited(Note
13)..................... -- -- -- -- (1,206,667) 1,258,000 -- 51,333
Amortization of non-
employee options........ -- -- -- -- 559,120 -- -- 559,120
Warrants issued for
services in lieu of
cash(Note 10)........... -- -- -- -- 2,140,000 -- -- 2,140,000
Options accelerated
vesting(Note 13)........ -- -- -- -- 4,900,000 -- -- 4,900,000
Net loss................ -- -- -- -- -- -- (15,320,037) (15,320,037)
------ ---- ---------- -------- ----------- ---------- ------------ -----------
Balance at December 31,
1999.................... -- $-- 11,071,054 $110,710 $75,155,266 $ -- $(28,641,331) $46,624,645
====== ==== ========== ======== =========== ========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
HOLLIS-EDEN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
(AUG. 15, 1994)
FOR THE YEAR ENDED DECEMBER 31, TO DECEMBER 31,
-------------------------------------- ---------------
1999 1998 1997 1999
------------ ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss.............. $(15,320,037) $(5,427,453) $(5,252,884) $(28,641,331)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation.......... 68,337 21,599 6,008 96,538
Common stock issued
as consideration for
amendments to the
license agreements... -- -- -- 32,540
Common stock issued
as consideration for
termination of a
finance agreement.... -- -- -- 33,962
Common stock issued
as consideration for
license fees and
services............. -- 595,000 -- 595,000
Expense related to
warrants issued as
consideration to
consultants.......... 2,140,000 -- -- 2,140,000
Expense related to
options issued as
consideration to
consultants.......... -- 408,000 8,024 422,041
Expense related to
warrants issued to a
director for
successful closure
of merger............ -- -- 570,000 570,000
Expense related to
stock options
Issued............... 4,900,000 240,000 -- 5,140,000
Deferred compensation
expense related to
options issued....... 620,482 308,000 282,000 1,210,482
Changes in assets and
liabilities:
Prepaid expenses...... (88,737) 16,731 55,852 (114,987)
Deposits.............. (18,022) -- 90,837 (27,185)
Receivable--tax
refund............... -- 105,436 (105,436) --
Receivable from
related party........ (27,000) 46,679 (46,679) (27,000)
Loan receivable from
related party........ (11,004) (206,663) -- (217,667)
Accounts payable and
accrued expenses..... 908,527 103,067 (82,263) 1,140,225
Wages payable......... 500,000 -- (96,771) 500,000
License fees payable
to related party..... -- -- (499,700) --
R & D fees payable to
related party........ -- (338,000) 338,000 --
Disposal of assets.... 6,833 -- -- 6,833
------------ ----------- ----------- ------------
Net cash used in
operating
activities......... (6,320,621) (4,127,604) (4,733,012) (17,140,549)
Cash flows provided by
investing activities:
Purchase of property
and equipment........ (374,696) (31,001) (82,542) (495,240)
------------ ----------- ----------- ------------
Net cash used in
investing
activities......... (374,696) (31,001) (82,542) (495,240)
Cash flows from
financing activities:
Borrowings from
related party........ -- -- 92,000 342,000
Payments on note
payable to related
party................ -- -- (92,000) (342,000)
Contributions from
stockholder.......... -- -- -- 103,564
Net proceeds from
sale of preferred
stock................ -- 4,000,000 -- 4,000,000
Net proceeds from
sale of common
stock................ 24,772,506 15,889,829 -- 42,171,834
Proceeds from
issuance of debt..... -- -- -- 371,164
Net proceeds from
recapitalization..... -- -- 6,270,782 6,270,782
Net proceeds from
warrants/options
exercised............ 5,219,168 1,355,962 5,629,478 12,204,608
------------ ----------- ----------- ------------
Net cash from
financing
activities......... 29,991,674 21,245,791 11,900,260 65,121,952
Net increase in cash
and equivalents....... 23,296,357 17,087,186 7,084,706 47,486,163
Cash and equivalents at
beginning of period... 24,189,806 7,102,620 17,914 --
------------ ----------- ----------- ------------
Cash and equivalents at
end of period......... $ 47,486,163 $24,189,806 $ 7,102,620 $ 47,486,163
============ =========== =========== ============
Supplemental disclosure
of cash flow
information:
Interest paid.......... $ -- $ 1,726 $ 199 $ 46,407
Conversion of debt to
equity................ -- -- -- 371,164
Options issued to
consultants in lieu of
cash, no vesting...... -- -- -- 24,069
Options issued in lieu
of cash, commissions
on private placement.. 600,000 -- -- 733,110
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
HOLLIS-EDEN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY
Hollis-Eden Pharmaceuticals Inc., a development stage pharmaceutical
company, is engaged in the discovery, development and commercialization of
products for the treatment of infectious diseases and immune system disorders,
including HIV/AIDS, hepatitis C and malaria. Since its inception (August 15,
1994) through March 1997, the Company's efforts have been directed toward
organizing, research and development and preparing for offerings of shares of
its common stock. Since 1997, the Company has been expanding its intellectual
property, developing its lead drug candidates, performing preclinical tests
and has entered into several human clinical trials. The Company is focusing
its initial development efforts on a potent series of adrenal steroid hormone
analogs. The lead compound in this series, HE2000, is currently in Phase I/II
clinical studies in the U.S. and South Africa. To date, the Company has not
developed commercial products or generated sales for the period August 15,
1994 through December 31, 1999.
2. SUMMARY OF ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers any liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Because of the short
maturities of these investments, the carrying amount is a reasonable estimate
of fair value. At December 31, 1999, the Company's cash equivalents totaling
$47,313,465 are deposited in a money market mutual fund with a large financial
institution.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated over the estimated
useful lives of the assets (five and seven years) using the straight-line
method.
RESEARCH AND DEVELOPMENT
Research and development costs consist of license fee expenses related to
license agreements as well as research and development expenses with related
parties and clinical trial expenses. Such amounts paid or payable to related
parties aggregated $500,000, $1,267,259, and $3,068,000 for the years ended
December 31, 1999, 1998 and 1997, respectively, and $6,335,021 for the period
from inception (August 15, 1994) to December 31, 1999. Such expenses are
recognized as research and development, as incurred.
INCOME TAXES
The Company provides for income taxes under the principles of Statement of
Financial Accounting Standards No. 109 (SFAS 109) which requires that
provision be made for taxes currently due and for the expected future tax
effects of temporary differences between book and tax bases of assets and
liabilities.
FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, other
receivables, accounts payable, and accrued expenses. These financial
instruments are stated at their respective carrying values, which approximate
their fair values.
F-7
<PAGE>
HOLLIS-EDEN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NET LOSS PER SHARE
Net loss per share is presented as basic earnings based upon the weighted
average number of common shares. Diluted earnings per share have not been
presented as the common stock equivalents and their effect on earnings per
share is anti-dilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires companies to
recognize all derivative contracts at their fair values, as either assets or
liabilities on the balance sheet. If certain conditions are met, a derivative
may be specifically designated as a hedge, the objective of which is to match
the timing of gain or loss recognition on the hedged derivative with the
recognition of (1) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk, or (2) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized as income in the period of
change. SFAS No. 133 if effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. Historically the Company has not entered into
derivative contracts either to hedge existing risks or for speculative
purposes. The adoption of this new standard is not expected to have a material
effect on the financial statements.
3. RECAPITALIZATION
On March 26, 1997, Hollis-Eden Inc. was merged with and into the Company
(then known as IAC), pursuant to an Agreement and Plan of Merger, dated
November 1, 1996, among IAC, Hollis-Eden Inc., Mr. Salvatore J. Zizza and Mr.
Richard B. Hollis (the "Merger"). Upon consummation of the Merger, Hollis-Eden
Inc. ceased to exist, and IAC changed its name to Hollis-Eden Pharmaceuticals,
Inc. IAC (now called Hollis-Eden Pharmaceuticals, Inc.) remains the continuing
legal entity and registrant for Securities and Exchange Commission reporting
purposes. The Merger was intended to be a tax-free reorganization for federal
income tax purposes and was accounted for as a recapitalization of Hollis-Eden
Inc. by an exchange of Common Stock of Hollis-Eden Inc., $.0001 par value
("Hollis-Eden Inc. Common Stock"), for the net assets of IAC, consisting
primarily of cash.
Under the terms of the Merger agreement, each share of Hollis-Eden Inc.
Common Stock outstanding immediately prior to the closing of the Merger
converted into one share of Common Stock, $.01 par value, of Hollis-Eden
Pharmaceuticals, Inc. Common Stock ("Company Common Stock"), and all warrants
and options to purchase Hollis-Eden Inc. Common Stock outstanding immediately
prior to the Merger converted into the right to receive the same number of
shares of Company Common Stock. At the closing of the Merger, 4,911,004 shares
of Company Common Stock were issued, which represented approximately 85% of
the shares of Company Common Stock outstanding immediately after consummation
of the Merger.
For accounting and financial reporting purposes, the Merger was treated as
a recapitalization of Hollis-Eden. Since IAC had no business operations other
than the search for a suitable target business, IAC's assets were recorded in
the balance sheet of the Company at book value. Upon the consummation of the
Merger, the
F-8
<PAGE>
HOLLIS-EDEN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Company had $6.5 million in cash and other receivables, and incurred
transaction costs of approximately $230,000 associated with the Merger for net
proceeds totaling $6.3 million which was recorded as equity. Additional
transaction costs totaling $4.7 million represent a charge for (i) warrants to
purchase an aggregate of 452,830 shares of Company Common Stock at an exercise
price of $2.475 issued to the placement agent (Note 11) upon the closing of
the Merger pursuant to an agreement and (ii) an aggregate of 50,000 shares of
Company Common Stock issued for legal and consulting services upon the closing
of the Merger. An estimate of $11.50 per share was used to calculate the
charges which approximates fair market value on the date of the Merger. These
charges constitute transaction fees and accordingly have been recorded as a
charge and an offsetting credit to additional paid-in capital.
Upon the consummation of the Merger, pursuant to an agreement, the Company
issued warrants to purchase an aggregate of 50,000 shares of Company Common
Stock at an exercise price of $0.10 per share to a director and former
officer. Additional paid-in capital was increased by $570,000 with an
offsetting $570,000 charge recorded to operations during the three months
ended March 31, 1997.
The Company's 1997 Stock Incentive Stock Option Plan became effective on
February 5, 1997 and was approved by the stockholders on March 26, 1997. A
total of 2,250,000 shares of Company Common Stock have been authorized for
issuance under the plan (see Note 13).
4. NOTICE OF REDEMPTION AND EXERCISE OF WARRANTS
On March 27, 1997, the Company sent a Notice of Redemption to holders of
its Class A Common Stock Purchase Warrants and Class B Unit Purchase Warrants,
stating that it would redeem all of such outstanding warrants on April 28,
1997 at a redemption price of $0.05. The right to exercise such Warrants
terminated on April 25, 1997. 603,415 of the Class A Common Stock Purchase
Warrants and 254,950 Class B Unit Purchase Warrants were exercised into an
aggregate of 858,365 shares of Company Common Stock. The gross proceeds to the
Company were $5.5 million. The Company incurred approximately $42,000 in
transaction costs associated with the exercise and redemption of the warrants
which was recorded against equity.
5. FINANCING
During January 1999, the Company completed two private placements of an
aggregate of 1,367,868 shares of Common Stock at prices ranging from $18.00 to
$18.50 per share. In connection with the private placements, the Company
issued warrants to purchase an aggregate of 90,000 shares of the Company's
Common Stock, with an exercise price of $18.25 per share, as a finder's fee.
The Company raised approximately $25.0 million in gross proceeds.
6. NOTE RECEIVABLE FROM RELATED PARTY
On May 22, 1998, the Company entered into a promissory note with a
stockholder/officer in the amount of $200,000. Interest is at 5.5% per annum.
The note is due and payable in full on May 22, 2001.
7. INCOME TAXES
The Company has available a net operating loss carryforward of
approximately $20 million at December 31, 1999 which may be carried forward as
an offset to taxable income, if any, in future years through its expiration in
2012 to 2014. The Company has a net deferred tax asset of approximately $8
million at December 31, 1999 comprised of capitalized start-up costs, research
and development credits, and the net operating loss carryforward. The net
deferred tax asset has been fully reserved due to the uncertainty of the
Company being
F-9
<PAGE>
HOLLIS-EDEN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
able to generate net operating income under the more likely than not criteria
of SFAS 109. If certain substantial changes in the Company's ownership should
occur, there would potentially be an annual limitation on the amount of the
carryforwards, which could be utilized in a tax year.
8. REVERSE STOCK SPLITS
In March 1996, a 1 for 2.65 split of the Company's common stock was
effected. Also, on February 13, 1995 there was a 3 for 5 split of the
Company's common stock. All stock splits have been retroactively restated for
all periods presented.
9. RELATED PARTY LICENSES AND OTHER AGREEMENTS AND COMMITMENTS AND
CONTINGENCIES
During 1994, the Company entered into two license agreements and one
research, development and option agreement as discussed in the following
paragraphs.
Pursuant to a license agreement dated May 18, 1994 (Colthurst License
Agreement) with related parties Patrick T. Prendergast, a significant
stockholder at the time, and with Colthurst Limited, a company controlled by
Patrick T. Prendergast, the Company acquired the exclusive worldwide rights of
Mr. Prendergast's patent rights, know-how and background technology relating
to the treatment of human/animal immunodeficiency. The agreement was amended
on August 11, 1995 to change the license fee payment terms as discussed below
in paragraph four of this Note. Per, the license agreement, the Company agreed
to pay royalties on product revenues.
On August 25, 1994, the Company entered into a license agreement (Edenland
License Agreement) with a related party, Edenland Inc., a company controlled
by Patrick T. Prendergast, for the exclusive worldwide rights of Mr.
Prendergast's patent rights, know-how and background technology related to the
substance tradenamed HE317 and to any other pharmaceutical product that became
subject to the license agreement under the research, development and option
agreement discussed below. The agreement was amended on August 11, 1995 to
change the license fee payment terms as discussed in the following paragraph.
Per the Edenland License Agreement, the Company agreed to pay royalties on
product revenues.
Effective August 11, 1995, Edenland, Inc., Colthurst Limited and the
Company entered into amendments concerning the license fee payment terms to
the two agreements described above. Under this amendment, the Company agreed
to pay a license fee by April 28, 1996 plus additional license fees within 24
months of April 1996. The balance of these fees was paid in full by May 1997.
As consideration for entering into certain amendments, the Company issued
75,472 shares of the Company's common stock to Edenland, Inc. and Colthurst
Limited.
Per the amended Colthurst License Agreement, a renewal annual license fee
was payable commencing May 1998. The Company paid this fee in 1998 by issuing
shares of its common stock and, in 1999, paid cash.
In August 1994, the Company entered into a Research, Development and Option
Agreement, with Edenland, Inc. and Mr. Prendergast. The agreement provided for
the development of HE317 to a certain stage of
F-10
<PAGE>
HOLLIS-EDEN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
development and granted the Company the right of first option on new products
developed by Edenland, Inc. The agreement committed the Company to pay for
certain development costs up to the amount of $3,000,000 with certain
contingencies for funding.
In October 1996, the Company and Edenland, Inc. entered into an amendment
to the existing Research, Development and Option Agreement. This amendment
accelerated the date that the $3,000,000 payment for HE317 or other product
development costs was to be made. A payment of $1,500,000 was payable upon the
closing of the Merger with IAC and the balance was contingent upon future
funding events. $2,700,000 of the $3,000,000 was paid in 1997 with the
remaining $300,000 accrued as an expense in 1997 and paid in April 1998.
In January 2000, the Colthurst License Agreement, the Edenland License
Agreement, and the Research, Development and Option Agreement were terminated
and replaced with new agreements (see Note 16).
10. COMMON STOCK PURCHASE WARRANTS
SERIES A WARRANTS
During April 1996, in accordance with anti-dilution privileges triggered by
an offering in March 1995, the Company issued 1,018,866 Series A Warrants to
all stockholders of record as of March 1995 to purchase the same number of
shares of common stock at a price of $11.02 per share, exercisable until
January 7, 2002.
SERIES B WARRANTS
During February 1995, the Company issued 37,736 Series B Warrants to
Edenland, Inc. in consideration for an amendment to the Edenland License
Agreement. The warrants are exercisable until February 5, 2000, to purchase
the same number of shares of common stock at a price of $15.90 per share.
PLACEMENT AGENT WARRANTS
During May 1996, the Company issued to the placement agent, for the
completion of the private placement in April 1996 (see Note 11), a warrant to
purchase an aggregate of up to 445,000 shares of common stock, at an exercise
price of $2.475 per share. The fair value of the 445,000 options is deducted
from the net proceeds of the private placement as a cost of raising capital
and totaled approximately $133,000.
Upon the successful closure of the Merger and Redemption of the Class A
Common Stock Purchase Warrants and Class B Unit Purchase Warrants, the Company
issued additional placement agent warrants to purchase 452,830 shares of
common stock at an exercise price of $2.475 per share.
IAC MANAGEMENT WARRANTS
During April 1994, the Company issued warrants, to existing shareholders
and management, to purchase 160,000 units (the "Units") at $10.00 per Unit,
each unit to be identical to the Units issued as part of its initial public
offering, exercisable until May 15, 2000. Each Unit consists of (i) one share
of common stock, $.01 par value per share and (ii) one Class A Warrants
entitling the holder to purchase one share of common stock at a price of $9.00
per share.
F-11
<PAGE>
HOLLIS-EDEN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
REPRESENTATIVES WARRANTS
In connection with the Company's initial public offering, the Company
issued warrants to the underwriters for 60,000 Units at an exercise price of
$11.00 per Unit and 24,000 Class B Warrants at an exercise price of $5.775 per
warrant and exercisable until May 15, 2000. Each Class B Warrant entitles the
holder to purchase one Unit (i.e. one share of common stock and one Class A
Warrant).
INVESTOR RELATIONS WARRANTS
During February 1998, as part of payment for investor relations, the
Company issued 150,000 warrants with an exercise price of $14.75 per share and
an expiration date of February 4, 1999. The warrants were estimated to have a
value of $408,000, which was expensed in 1998.
1998 PRIVATE PLACEMENT WARRANTS
In connection with the May 1998 private placement, the Company issued
warrants to purchase 1,437,475 shares of common stock at an exercise price of
$17.00 per share. The warrants are exercisable until May 6, 2001. Of the
warrants issued, 157,000 were issued as finder fees, and 1,280,475 were issued
to the private placement investors.
1999 AGENT WARRANTS
In connection with the January 1999, private placement, the Company issued
warrants to purchase 90,000 shares of common stock as a finders fee. The
warrants are exercisable until January 22, 2002 at an exercise price of $18.25
per share.
1999 CONSULTING WARRANTS
During March 1999, the Company entered into a three-year agreement with a
financial consulting organization affiliated with a director of the Company.
The Company agreed to issue as compensation for services, warrants to purchase
500,000 shares of Common Stock with an exercise price of $20.50 per share and
an expiration date of March 2002. The warrants are not subject to any vesting
provisions. The warrants were estimated to have a value of approximately $2.1
million, which was expensed as a non-cash charge during the first quarter of
1999.
F-12
<PAGE>
HOLLIS-EDEN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes stock warrant activity for 1997 through
1999:
<TABLE>
<CAPTION>
PRICE PER SHARE
----------------------
WEIGHTED
SHARES RANGE AVERAGE
--------- ------------- --------
<S> <C> <C> <C>
Outstanding, December 31, 1996.............. 3,099,602 $0.25 - 15.90 $ 8.16
1997
Issued...................................... 502,830 0.10 - 2.48 2.24
Exercised................................... 977,594 0.10 - 9.00 5.80
Canceled.................................... 251,635 0.25 - 9.00 9.00
Outstanding, December 31, 1997.............. 2,373,203 2.48 - 15.90 7.79
1998
Issued...................................... 1,587,475 14.75 - 7.00 16.79
Exercised................................... 398,359 2.48 - 10.00 3.01
Outstanding, December 31, 1998.............. 3,562,319 2.48 - 17.00 12.33
1999
Issued...................................... 590,000 18.25 - 20.50 20.16
Exercised................................... 755,423 2.48 - 14.75 6.88
Canceled.................................... 6,918 11.02 11.02
Outstanding, December 31, 1999.............. 3,389,978 $2.48 - 20.50 $14.91
</TABLE>
For various price ranges, the following table summarizes the weighted
average prices of outstanding warrants as of December 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
------------------------------------------------------
WEIGHTED
RANGE OF AVERAGE
EXERCISE PRICES SHARES PRICE
--------------- ------ --------
<S> <C> <C>
$ 2.48 - $ 5.00 68,849 $2.48
$ 5.01 - $10.00 224,380 9.27
$10.01 - $15.00 1,031,538 11.02
$15.01 - $20.00 1,565,211 17.05
$20.01 - $25.00 500,000 20.50
</TABLE>
11. COMMON STOCK
On January 21, 1996, the Company completed a $367,522 round of debt
financing with a group of private investors. These notes were due on or before
the earlier of (i) January 21, 1997 or (ii) the closing of a private or public
offering of securities. These notes bear interest at 8% per annum. The Company
had the option to repay these notes with common stock of the Company. Proceeds
from this debt financing were used to repay the note and accounts payable to
related party, and accrued interest totaling $371,164. During April 1996, the
debt financing, plus accrued interest, were converted into 164,962 shares of
common stock at a price of $2.25 per share. During March and April of 1996,
the Company privately issued 580,005 shares of the Company's common stock at
an offering price of $2.25 per share. Total proceeds from this offering
aggregated $1,234,499.
F-13
<PAGE>
HOLLIS-EDEN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
During May 1998, the Company completed a private financing totaling $20.6
million in gross proceeds. The Company issued 1,329,201 shares of Common
Stock, (of which 192,061 shares are subject to adjustment based on future
average stock price ("Adjustable Common Stock")), 4,000 shares of 5% Series A
Convertible Preferred Stock and Warrants to purchase 1,437,475 shares of
Common Stock in the financing. The Warrants are exercisable for three years
and entitle the holders to purchase up to a total of 1,437,475 shares of
Common Stock at a price of $17.00 per share.
The Convertible Preferred Stock had an initial conversion price of $20.30
for the first seven months, after which it can be adjusted, either up or down,
based on the future stock prices of the Company's Common Stock. The
Convertible Preferred Stock was converted to Common Stock in January 1999 (See
Note 12).
12. PREFERRED STOCK
During May 1998, as part of the private placement, the Company issued 4,000
shares of convertible preferred stock for proceeds of $4,000,000.
During January 1999, the Company issued 346,127 shares of common stock in
connection with the conversion of the Series A convertible preferred stock and
additional shares relating to the Adjustable Common Stock. The Adjustable
Common Stock was issued during the private placement of May 1998 and was
subject to adjustment based on the future average stock price of the Company's
Common Stock as described in Note 11.
In November 1999, the Company adopted a Shareholders Rights Plan in which
Preferred Stock purchase rights ("Rights") were distributed as a dividend at
the rate of one Right for each share of common stock held as of the close of
business on November 29, 1999. Each right entitles stockholders to buy, upon
certain events, one one-hundredth of a share of a new Series B junior
participating preferred stock of the Company at an exercise price of $100.00.
The Rights are designed to guard against partial tender offers and other
abusive tactics that might be used in an attempt to gain control of the
Company or to deprive stockholders of their interest in the long-term value of
the Company. The Rights are exercisable only if a person or group acquires 15%
or more of the Company's common stock or announces a tender offer of which the
consummation would result in ownership by a person or group of 15% or more of
the Company's common stock. The Rights are redeemable for one cent per Right
at the option of the Board of Directors prior to this event occurring. The
Rights expire on November 14, 2009.
F-14
<PAGE>
HOLLIS-EDEN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
13. STOCK OPTIONS
The 1997 Stock Option Plan (the "Plan") was approved by the shareholders in
1997. Under the Plan, 2,250,000 shares of common stock have been reserved for
issuance to employees, officers, directors, and consultants of the Company and
provides for the grant of incentive and nonstatutory stock options. Terms of
the stock option agreements, including vesting requirements, are determined by
the Board of Directors. The exercise price of incentive stock options must
equal at least the fair market value on the date of grant. The options expire
not later than ten years from the date of the grant and become exercisable
immediately or generally are exercisable ratably over a three-year period
beginning one year from the date of the grant. The following table summarizes
stock option activity under the Plan for 1997 through 1999:
<TABLE>
<CAPTION>
PRICE PER SHARE
----------------------
WEIGHTED
SHARES RANGE AVERAGE
--------- ------------- --------
<S> <C> <C> <C>
1997
Granted..................................... 518,500 $2.25 - 8.70 $ 7.12
Exercised................................... 166 2.25 2.25
Canceled.................................... 334 2.25 2.25
Outstanding, December 31, 1997.............. 518,000 6.75 - 8.70 7.13
1998
Granted..................................... 340,800 13.25 - 16.75 14.52
Canceled.................................... 100,000 8.70 8.70
Outstanding, December 31, 1998.............. 758,800 6.75 - 16.75 10.24
1999
Granted..................................... 776,165 10.56 - 16.63 12.70
Canceled.................................... 61,000 14.06 - 14.63 14.63
Outstanding, December 31, 1999.............. 1,473,965 $6.75 - 16.75 $11.36
</TABLE>
The Company entered into stock options agreements outside of the Plan with
certain directors, officers and consultants. These options become exercisable
according to a schedule of vesting as determined by the Board of Directors.
During 1998 and 1999, the Company granted options to certain consultants and
directors, and will recognize $900,000 and $380,000 in expense related to
these options ratably over the three-year vesting period, $240,000 and
$559,120 was expensed in 1998 and 1999 respectively.
In February 1997, as part of an employment agreement, the Company granted a
non-statutory stock option to an executive to purchase 2,400,000 shares of the
Company's common stock at a price of $5.00 per share, which option vested
ratably over a six-year period. The intrinsic value of the options was
$1,848,000. As a result, the Company recorded as deferred compensation a non-
cash charge of $1,848,000, which was being amortized ratably over the six-year
vesting period. Through February 28, 1999 the Company had amortized a total of
$641,333. On March 1, 1999, the Company announced the resignation of this
executive. Concurrent therewith, the Company accelerated the vesting of
300,000 stock options previously granted to the executive. This acceleration
is considered to be a new grant of options and, as such, the Company took a
one-time non-cash charge of $4.9 million during the first quarter of 1999.
F-15
<PAGE>
HOLLIS-EDEN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes stock option activity not pursuant to the
Plan for 1995 through 1999:
<TABLE>
<CAPTION>
PRICE PER SHARE
----------------------
WEIGHTED
SHARES RANGE AVERAGE
--------- ------------- --------
<S> <C> <C> <C>
1995
Granted..................................... 37,736 $ 2.65 - 7.95 $4.64
Outstanding, December 31, 1995.............. 37,736 2.65 - 7.95 4.64
1996
Granted..................................... 570,000 2.25 2.25
Outstanding, December 31, 1996.............. 607,736 2.25 - 7.95 2.40
1997
Granted..................................... 2,400,000 5.00 5.00
Canceled.................................... 50,000 2.25 2.25
Outstanding, December 31, 1997.............. 2,957,736 2.25 - 7.95 4.51
1998
Exercised................................... 53,302 2.25 - 5.30 2.93
Canceled.................................... 50,000 2.25 2.25
Outstanding, December 31, 1998.............. 2,854,434 2.25 - 7.95 4.58
1999
Granted..................................... 300,000 16.63 16.63
Exercised................................... 9,434 7.95 7.95
Canceled.................................... 1,200,000 5.00 5.00
Outstanding, December 31, 1999.............. 1,945,000 $2.25 - 16.63 $6.16
</TABLE>
For various price ranges, weighted average characteristics of outstanding
stock options at December 31, 1999 were as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
--------------------------------- ---------------------
REMAINING WEIGHTED WEIGHTED
RANGE OF LIFE AVERAGE AVERAGE
EXERCISE PRICES SHARES (YEARS) PRICE SHARES PRICE
--------------- ------ --------- -------- ------ --------
<S> <C> <C> <C> <C> <C>
$ 2.25 - $ 4.99 445,000 5.1 $2.25 445,000 $2.25
$ 5.00 - $ 8.99 1,618,000 9.6 5.45 1,350,945 5.20
$ 9.00 - $12.99 388,165 9.9 10.56 -- --
$13.00 - $16.99 967,800 9.4 15.30 131,300 14.68
</TABLE>
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 ("SFAS 123")
During 1995, the Financial Accounting Standards Board issued SFAS 123,
Accounting for Stock-Based Compensation, which defines a fair-value-based
method of accounting for stock compensation plans. However, it also allows an
entity to continue to measure compensation cost related to stock compensation
plans using the method of accounting prescribed by the Accounting Principles
Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees.
Entities electing to follow APB 25 must make pro forma disclosures of net
income, as if the fair-value-based method of accounting defined in SFAS had
been applied.
F-16
<PAGE>
HOLLIS-EDEN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company has elected to account for its stock-based compensation plans
under APB 25; however, for pro forma disclosure purposes, the Company has
computed the value of all options granted to employees during 1997 through
1999, using the Black-Scholes option pricing model with the following weighted
average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Risk free interest rate........................... 5.31% 5.55% 5.90%
Expected dividend yield........................... 0% 0% 0%
Expected lives.................................... 5 years 5 years 5 years
Expected volatility............................... 46.5% 46.5% 46.5%
</TABLE>
The warrants were assumed to be exercised at maturities of three to five
years, while the stock options were assumed to be exercised in five to seven
years. Adjustments are made for options forfeited prior to vesting. The total
value of warrants and options was computed to be the following approximate
amounts, which would be amortized on the straight-line basis over the vesting
period of the options:
<TABLE>
<S> <C>
Year ended December 31, 1997..................................... $1,777,270
Year ended December 31, 1998..................................... $1,435,510
Year ended December 31, 1999..................................... $6,662,315
</TABLE>
If the Company had accounted for stock options issued to employees and
directors in accordance with SFAS 123, the Company's net loss would have been
reported as follows:
Net loss
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
As reported................................ $15,320,037 $5,427,453 $5,252,884
Pro forma.................................. $21,982,352 $6,862,963 $7,030,154
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
subjective input assumptions can materially affect the fair value estimate, in
management's opinion the existing models do not necessarily provide a reliable
single measure of the fair value of the Company's options.
The weighted average, estimated fair values of employee stock options
granted during fiscal 1999, 1998 and 1997 were $15.30, $14.52 and $5.38 per
share, respectively.
14. EMPLOYMENT AGREEMENT
Pursuant to an employment agreement between Hollis-Eden and Mr. Richard B.
Hollis entered into in November 1996 (the "Hollis Employment Agreement"), Mr.
Hollis' annual base salary was increased to $225,000 upon the consummation of
the Merger, with bonuses and equity compensation as determined by the Hollis-
Eden Pharmaceuticals Board of Directors. On January 1, 1999, Mr. Hollis' base
salary was increased to $330,000. If Mr. Hollis' employment is terminated
"without cause," "for insufficient reason" or pursuant to a "change in
control" (as such terms are defined in the Hollis Employment Agreement), Mr.
Hollis will receive as
F-17
<PAGE>
HOLLIS-EDEN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
severance (i) an amount equal to five times his then current annual base
salary plus five times the amount of the bonus awarded to him in the prior
calendar year, (ii) immediate vesting of all unvested stock options of
Hollis-Eden Pharmaceuticals (or the Surviving Corporation, if applicable) held
by him and (iii) continued benefits under all employee benefit plans and
programs for a period of three years. All of such payments are to be made in
one lump sum within 30 days of termination. If Mr. Hollis' employment is
terminated "with cause" or if Mr. Hollis resigns other than for "sufficient
reason," Mr. Hollis' compensation and benefits will cease immediately and Mr.
Hollis will not be entitled to severance benefits.
15. LEASES
Rental expenses for principally leased facilities under operating leases
were $315,000, $115,000 and $69,000 for 1999, 1998 and 1997, respectively.
Future minimum payments for operating leases are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
2000............................................................ $385,148
2001............................................................ 316,092
2002............................................................ 223,540
2003............................................................ 23,556
2004............................................................ 9,815
--------
Total minimum lease payments.................................... $958,151
========
</TABLE>
16. SUBSEQUENT EVENTS
On January 20, 2000, Hollis-Eden reached a settlement on its pending
arbitration with Patrick T. Prendergast, Colthurst and Edenland. The
Settlement and Mutual Release Agreement completely disposes of all of the
matters that were at issue in the pending arbitration. In addition, the
parties entered into two new technology agreements, the Technology Assignment
Agreement and the Sponsored Research and License Agreement.
The Technology Assignment Agreement replaces the Colthurst License
Agreement dated May 18, 1994 among Hollis-Eden, Mr. Prendergast and Colthurst.
Pursuant to the Technology Assignment Agreement, Mr. Prendergast and Colthurst
assigned to Hollis-Eden ownership of all patents, patent applications and
current or future improvements of the technology under the Colthurst License
Agreement, including HE2000, Hollis-Eden's lead clinical compound. The annual
license fee of $500,000 and the royalty obligations under the Colthurst
License Agreement have been eliminated. In consideration for the foregoing,
Hollis-Eden agreed to issue to Colthurst 660,000 shares of Common Stock and a
warrant to purchase an aggregate of 400,000 shares of Common Stock at $25 per
share. Only 132,000 of such shares of Common Stock will be issued in 2000,
with the remaining 528,000 shares to be issued over the next four years
conditioned on continued compliance with the agreement. In addition, all of
the shares under the warrant will vest over the next four years conditioned on
continued compliance with the agreement. Continued compliance with the
agreement is not dependent upon any substantive actions to be performed or
taken by Prendergast, Colthurst or Edenland. The compliance relates primarily
to (i) support of the Company's actions (as defined) and (ii) not conducting
any research and development activities relating to the transferred
technology. The Sponsored Research and License Agreement replaces both the
Edenland License Agreement and the Research, Development and Option Agreement,
each dated August 25, 1994 among Hollis-Eden, Mr. Prendergast and Edenland.
Pursuant to the Sponsored Research and License Agreement, Edenland exclusively
licensed to Hollis-Eden a number of compounds, together with all related
patents and patent applications, and Hollis-Eden agreed to fund additional
pre-clinical research projects
F-18
<PAGE>
HOLLIS-EDEN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
conducted by Edenland. Hollis-Eden will also have exclusive license rights to
all results of such research and will have royalty obligations to Edenland on
sales of new products, if any, resulting from such research.
The settlement resulted in the Company acquiring the technology and
terminating future obligations under the License Agreements. Since the
technology is still in its early stages, Hollis-Eden expects to take a one-time
charge to research and development expenses of approximately $12.7 million
during the first quarter of 2000.
F-19
<PAGE>
CONSULTING AGREEMENT
Consulting Agreement ("Agreement") by and among HOLLIS-EDEN
PHARMACEUTICALS, INC., a Delaware corporation (the "Company"), WILLIAM H. TILLEY
and JACMAR/VIKING, L.L.C. ("Consultant") as of the 8th of March, 1999 (the
"Effective Date").
RECITALS
Whereas, the Company's Board of Directors has appointed Tilley to fill a
vacancy on the Board of Directors and to serve as a Director of the Company;
WHEREAS, Tilley desires to serve on the Company's Board of Directors;
WHEREAS, the Company desires to retain Consultant to make Tilley available
to provide certain investor relations consulting service to the Company; and
WHEREAS, Consultant desires to provide certain investor relations
consulting service to the Company.
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
covenants hereinafter set forth, and for other good and valuable consideration,
the receipt and adequacy of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1. TERMS.
1.1 DUTIES OF CONSULTANT. The Company hereby retains Consultant to provide
investor relations consulting services for and during the term hereof, subject
to the direction of the Chief Executive Officer of the Company and the terms and
conditions hereof. Specifically, Consultant shall cause Tilley to introduce the
Company to, and act as the Company's liaison with, and provide the Company with
his opinions and recommendations with respect to, potential investors, strategic
partners and existing and potential investment bankers, broker-dealers,
analysts, market makers and underwriters, and taking other actions intended to
enhance stockholder value as reasonably requested by the Chief Executive Officer
of the Company. Consultant hereby accepts such retention under the terms and
conditions set forth in this Agreement. Consultant agrees to cause Tilley to
devote part of his business time and services to the faithful performance of the
duties, responsibilities, and authorities which may be reasonably assigned to
Consultant hereunder. It is understood that Tilley will not be providing his
services, through Consultant or otherwise, on a full-time basis.
1.2 BOARD MEMBERSHIP. Tilley agrees to serve on the Board of Directors of
the Company during the term of this Agreement.
1.3 TERM. Unless sooner terminated as provided in Section 1.5 hereof, this
Agreement has become effective as of the date set forth above and shall continue
in force and effect until the third anniversary of the date hereof.
1.
<PAGE>
1.4 COMPENSATION. As compensation for services rendered by Consultant, the
Company shall grant to Consultant a warrant to purchase 500,000 shares of the
Company's common stock at an exercise price of $20.50 per share. Such warrant
shall be transferable, shall not include a net exercise provision, shall contain
customary S-3 registration rights and shall expire on the third anniversary of
the date of this agreement. A form of such warrant is attached as Exhibit "A"
hereto. The Company may also grant such other stock options and other incentives
to Consultant for consulting services or to Tilley for serving as a director as
the Company's Board of Directors may determine in its sole discretion.
1.5 TERMINATION. Notwithstanding any other provisions in this Agreement:
(A) DEATH. If Tilley dies during the term of this Agreement, this
Agreement shall automatically terminate as of the date of his death; and
the Company shall have no further obligation to Consultant, Tilley or
Tilley's estate, except to pay Consultant or Tilley, as the case may be,
any accrued, but unpaid compensation under Section 1.4 hereof.
(B) VOLUNTARY TERMINATION BY CONSULTANT. In the event that during the
term hereof, Consultant shall voluntarily terminate this Agreement, or
Consultant shall refuse to perform the services required hereunder, then,
in such event, this Agreement shall automatically be terminated and
Consultant shall have the right to receive any unpaid compensation or
reimbursements to the date of termination, but no other compensation.
1.6 EXPENSE REIMBURSEMENT AND TRAVEL ADVANCES. Consultant or Tilley, as the
case may be, shall be entitled to reimbursement for any and all reasonable
expenses, including travel and entertainment, incurred by Consultant or Tilley,
as the case may be, in the performance of this Agreement. Consultant or Tilley,
as the case may be, will take all actions necessary to maintain the tax
deductibility of any such expenses by the Company and shall submit vouchers
prior to reimbursement for expenses. All expense report vouchers of Consultant
or Tilley, as the case may be, shall be approved by the Chief Executive Officer
of the Company. Expenses in excess of $1,000.00 per occurrence must be approved
in advance by the Chief Executive Officer of the Company.
1.7 PROTECTION FROM LIABILITY. The Company may provide Tilley with
appropriate insurance coverage as necessary to protect Tilley from any and all
personal liability incurred in the normal performance of Tilley's designated
duties. The Company agrees to indemnify Tilley to the fullest extent permitted
by law for any liabilities in connection with the lawful performance of services
hereunder.
2. PROTECTIVE COVENANTS. Because (i) Consultant and Tilley will become fully
familiar with all aspects of the Company's business during the period of this
Agreement with the Company, (ii) certain information of which Consultant and
Tilley will gain knowledge during this Agreement is proprietary and confidential
information which is of special and peculiar value to the Company, (iii) if any
such proprietary and confidential information were imparted to or became known
by any persons, including Consultant and Tilley, engaging in a business in
competition with that of the Company, hardship, loss and irreparable injury and
damage could result to the Company, the measurement of which would be difficult
if not impossible to ascertain, and (iv) it is necessary for the Company to
protect its business from such damage, the following covenants constitute a
reasonable and appropriate means, consistent with the best interests of
Consultant, Tilley and the
2.
<PAGE>
Company, to protect the Company against such damage and shall apply to and be
binding upon Consultant and Tilley as provided herein:
2.1 NON-COMPETITION BY CONSULTANT. Consultant and Tilley covenant that,
during the term of this Agreement and for a period of one year thereafter,
neither Consultant nor Tilley will engage in or participate in any business
which is in competition with the business of the Company on the date of
termination and which continues during the period of non-competition.
Notwithstanding the foregoing, Consultant and/or Tilley may make passive
investments in the aggregate of less than 5% of the outstanding equity
securities in any entity listed for trading on a national stock exchange or
quoted on any recognized automatic quotation system.
2.2 TRADE SECRETS, PROPRIETARY AND CONFIDENTIAL INFORMATION. Consultant and
Tilley recognizes that their position with the Company is one of the highest
trust and confidence by reason of Consultant's and Tilley's access to and
contact with trade secrets and confidential and proprietary information of the
Company. Consultant and Tilley shall use their best efforts and exercise utmost
diligence to protect and safeguard the trade secrets and confidential and
proprietary information of the Company. Consultant and Tilley covenant that
during the term of this Agreement and thereafter, they will not disclose,
disseminate or distribute to another, nor induce any other person to disclose,
disseminate, or distribute, any trade secret or proprietary or confidential
information of the Company, directly or indirectly, for Consultant's or Tilley's
own benefit or for the benefit of another, whether or not acquired, learned,
obtained or developed by Consultant or Tilley use or cause to be used, any trade
secret, proprietary or confidential information in any way except as is required
in the course of the services to the Company hereunder. The foregoing shall not
apply to information which becomes public or other than as a result of the
prohibited acts of Consultant or Tilley. All confidential information relating
to the business of the Company, whether prepared by Consultant or Tilley or
otherwise coming into its or his possession, shall remain the exclusive property
of the Company and shall not, except in the good faith furtherance of the
business of the Company, be removed from the premises of the Company under any
circumstances whatsoever without the prior written consent of the Company.
2.3 REMEDIES. In the event of breach or threatened breach by Consultant or
Tilley of any provision of this Section 2, the Company shall be entitled to
apply for relief by temporary restraining order, temporary injunction, or
permanent injunction and to all other relief to which it may be entitled,
including any said breach, violation or threatened breach or violation. The
Company may pursue any remedy available to it concurrently or consecutively in
any order as to any breach, violation, and the pursuit of any one of such
remedies at any time will not be deemed an election of remedies or waiver of the
right to pursue any other of such remedies as to such breach, violation, or as
to any other breach, violation, or threatened breach or violation.
3. MISCELLANEOUS.
3.1 NOTICES. All notices, requests, consents and other communications under
this Agreement shall be in writing and shall be deemed to have been delivered
(i) on the date personally delivered or (ii) two days after the date deposited
in a receptacle maintained by the United States Postal Services for such
purpose, addressed as set forth below, or (iii) one day after properly sent by
Federal Express, addressed as set forth below:
3.
<PAGE>
If to Consultant: JacMar/Viking, L.L.C.
2200 W. Valley Boulevard
Alhambra, CA 91803
If to Tilley: William H. Tilley
2200 W. Valley Boulevard
Alhambra, CA 91803
with a copy to: Latham & Watkins
701 "B" Street, Suite 2100
San Diego, CA 92102
Attn: Donald P. Newell, Esq.
If to the Company: Hollis-Eden Pharmaceuticals, Inc.
9333 Genesee Avenue, Suite 110
San Diego, CA 92121
Fax: (619) 558-6470
Attn: Chief Executive Officer
with a copy to: Cooley Godward LLP
4365 Executive Drive, Suite 1100
San Diego, CA 92121
Fax: (619) 453-3555
Attn: Eric J. Loumeau, Esq.
Either party hereto may designate a different address by providing written
notice of such new address to the other party hereto as provided above.
3.2 SEVERABILITY. If any provision contained in this Agreement is
determined to be void, illegal or unenforceable, in whole or in part, then the
other provisions contained herein shall remain in full force and effect as if
the provision which was determined to be void, illegal, or unenforceable had not
been contained herein.
3.3 WAIVER, MODIFICATION AND INTEGRATION. The waiver by any party hereto of
a breach of any provision of this Agreement shall not operate or be construed as
a waiver of any subsequent breach of any party. This instrument, and the
documents referred to herein, contain the entire agreement of the parties and
supersede any and all other agreements either oral or in writing, between the
parties hereto with respect to services of Consultant and Tilley to the Company
and contain all of the covenants and agreements between the parties with respect
to such services in any manner whatsoever. This Agreement may not be modified,
altered or amended except by written agreement of all parties hereto.
3.4 RELATIONSHIP. Consultant is an independent contractor and is
responsible for the withholding and payment of any applicable employment-related
taxes or unemployment compensation. This Agreement does not establish any
partnership, joint venture or other business association between the parties,
and Consultant shall have no interest in the management, business or property of
the Company, except as specifically provided herein.
3.5 GOVERNING LAW. This Agreement shall be governed by the internal laws of
the State of California, without regard to its conflicts of law principles.
4.
<PAGE>
3.6 TILLEY CONSENT. Tilley hereby agrees to make his services available to
Consultant to the extent necessary for Consultant to perform its obligations
hereunder. The Company is an intended third-party beneficiary of the covenant
set forth in the preceding sentence.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
HOLLIS-EDEN PHARMACEUTICALS, INC.,
a Delaware corporation
By: /s/ RICHARD B. HOLLIS
------------------------------------
Richard B. Hollis, CEO
JACMAR/VIKING, L.L.C.
a Delaware limited liability company
By: THE JACMAR COMPANIES
a California corporation
Its: Managing Member
By: /s/ JAMES A. DAL POZZO
-------------------------------
James A. Dal Pozzo,
President
By: /s/ WILLIAM H. TILLEY
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William H. Tilley
5.
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No. W-99-5
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT
AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE
SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY APPLICABLE
STATE SECURITIES LAWS.
WARRANT TO PURCHASE 500,000 SHARES
OF COMMON STOCK OF
HOLLIS-EDEN PHARMACEUTICALS, INC.
(Void after March 7, 2002)
This certifies that Jacmar/Viking, L.L.C., or its assigns (the "Holder"),
for value received, is entitled to purchase from Hollis-Eden Pharmaceuticals,
Inc., a Delaware corporation (the "Company"), having a place of business at 9333
Genesee Avenue, Suite 110, San Diego, California 92121, a maximum of 500,000
fully paid and nonassessable shares of the Company's Common Stock ("Common
Stock") for cash at a price of $20.50 per share (the "Stock Purchase Price") at
any time or from time to time up to and including 5:00 p.m. (Pacific time) on
March 7, 2002 (the "Expiration Date"), upon surrender to the Company at its
principal office (or at such other location as the Company may advise the Holder
in writing) of this Warrant properly endorsed with the Form of Subscription
attached hereto duly filled in and signed and, if applicable, upon payment in
cash or by check of the aggregate Stock Purchase Price for the number of shares
for which this Warrant is being exercised determined in accordance with the
provisions hereof. The Stock Purchase Price and the number of shares purchasable
hereunder are subject to adjustment as provided in Section 3 of this Warrant.
This Warrant is subject to the following terms and conditions:
1. EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES. This Warrant
is exercisable at the option of the holder of record hereof, at any time or from
time to time, up to the Expiration Date for all or any part of the shares of
Common Stock (but not for a fraction of a share) which may be purchased
hereunder. The Company agrees that the shares of Common Stock purchased under
this Warrant shall be and are deemed to be issued to the Holder hereof as the
record owner of such shares as of the close of business on the date on which
this Warrant shall have been surrendered, properly endorsed, the completed,
executed Form of Subscription delivered and payment made for such shares.
Certificates for the shares of Common Stock so purchased, together with any
other securities or property to which the Holder hereof is entitled upon such
exercise, shall be delivered to the Holder hereof by the Company at the
Company's expense within a reasonable time after the rights represented by this
Warrant have been so exercised. In case of a purchase of less than all the
shares which may be purchased under this Warrant, the Company shall cancel this
Warrant and execute and deliver a new Warrant or Warrants of like tenor for the
balance of the shares purchasable under the Warrant surrendered upon such
purchase to the Holder hereof within a reasonable time. Each stock certificate
so delivered shall be in such denominations of Common Stock as may be requested
by the Holder hereof and shall be registered in the name of such Holder.
1.
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2. SHARES TO BE FULLY PAID; RESERVATION OF SHARES; LISTING OF SHARES. The
Company covenants and agrees that all shares of Common Stock which may be issued
upon the exercise of the rights represented by this Warrant will, upon issuance,
be duly authorized, validly issued, fully paid and nonassessable and free from
all preemptive rights of any stockholder and free of all taxes, liens and
charges with respect to the issue thereof. The Company further covenants and
agrees that, during the period within which the rights represented by this
Warrant may be exercised, the Company will at all times have authorized and
reserved, for the purpose of issue or transfer upon exercise of the subscription
rights evidenced by this Warrant, a sufficient number of shares of authorized
but unissued Common Stock, or other securities and property, when and as
required to provide for the exercise of the rights represented by this Warrant.
The Company will take all such action as may be necessary to assure that such
shares of Common Stock may be issued as provided herein without violation of any
applicable law or regulation, or of any requirements of any domestic securities
exchange upon which the Common Stock may be listed; provided, however, that
other than as set forth in Section 11 hereof, the Company shall not be required
to effect a registration under Federal or State securities laws with respect to
such exercise. As long as the Warrant shall be outstanding, the Company shall
use its best efforts to cause all shares of Common Stock issuable upon the
exercise of the Warrant to be listed (subject to official notice of issuance) on
all securities exchanges on which the Common Stock may then be listed and/or
quoted. The Company will not take any action which would result in any
adjustment of the Stock Purchase Price (as set forth in Section 3 hereof) if the
total number of shares of Common Stock issuable after such action upon exercise
of all outstanding options, warrants and convertible securities, together with
all shares of Common Stock then outstanding, would exceed the total number of
shares of Common Stock then authorized by the Company's Certificate of
Incorporation.
3. ADJUSTMENT OF STOCK PURCHASE PRICE AND NUMBER OF SHARES. The Stock
Purchase Price and the number of shares purchasable upon the exercise of this
Warrant shall be subject to adjustment from time to time upon the occurrence of
certain events described in this Section 3. Upon each adjustment of the Stock
Purchase Price, the Holder of this Warrant shall thereafter be entitled to
purchase, at the Stock Purchase Price resulting from such adjustment, the number
of shares obtained by multiplying the Stock Purchase Price in effect immediately
prior to such adjustment by the number of shares purchasable pursuant hereto
immediately prior to such adjustment, and dividing the product thereof by the
Stock Purchase Price resulting from such adjustment.
3.1 SUBDIVISION OR COMBINATION OF STOCK. In case the Company shall at any
time subdivide its outstanding shares of Common Stock into a greater number of
shares, the Stock Purchase Price in effect immediately prior to such subdivision
shall be proportionately reduced, and conversely, in case the outstanding shares
of Common Stock of the Company shall be combined into a smaller number of
shares, the Stock Purchase Price in effect immediately prior to such combination
shall be proportionately increased.
3.2 DIVIDENDS IN COMMON STOCK, OTHER STOCK, PROPERTY, RECLASSIFICATION. If
at any time or from time to time the Holders of Common Stock (or any shares of
stock or other securities at the time receivable upon the exercise of this
Warrant) shall have received or become entitled to receive, without payment
therefor,
2.
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(a) Common Stock or any shares of stock or other securities which are
at any time directly or indirectly convertible into or exchangeable for Common
Stock, or any rights or options to subscribe for, purchase or otherwise acquire
any of the foregoing by way of dividend or other distribution, or
(b) Common Stock or additional stock or other securities or property
(including cash) by way of spinoff, split-up, reclassification, combination of
shares or similar corporate rearrangement, (other than shares of Common Stock
issued as a stock split or adjustments in respect of which shall be covered by
the terms of Section 3.1 above), then and in each such case, the Holder hereof
shall, upon the exercise of this Warrant, be entitled to receive, in addition to
the number of shares of Common Stock receivable thereupon, and without payment
of any additional consideration therefor, the amount of stock and other
securities and property (including cash in the cases referred to in clause (b)
above and this clause (c) which such Holder would hold on the date of such
exercise had he been the holder of record of such Common Stock as of the date on
which holders of Common Stock received or became entitled to receive such shares
or all other additional stock and other securities and property.
3.3 REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE. If
any recapitalization, reclassification or reorganization of the capital stock of
the Company, or any consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets or other
transaction shall be effected in such a way that holders of Common Stock shall
be entitled to receive stock, securities, or other assets or property (a
"Transaction"), then, as a condition of such Transaction, lawful and adequate
provisions shall be made by the Company whereby the Holder hereof shall
thereafter have the right to purchase and receive (in lieu of the shares of the
Common Stock of the Company immediately theretofore purchasable and receivable
upon the exercise of the rights represented hereby) such shares of stock,
securities or other assets or property as may be issued or payable with respect
to or in exchange for a number of outstanding shares of such Common Stock equal
to the number of shares of such stock immediately theretofore purchasable and
receivable upon the exercise of the rights represented hereby; provided,
however, that in the event the fair market value of the stock, securities or
other assets or property (determined in good faith by the Board of Directors of
the Company) issuable or payable with respect to one share of the Common Stock
of the Company immediately theretofore purchasable and receivable upon the
exercise of the rights represented hereby is in excess of the Stock Purchase
Price hereof effective at the time of a merger and securities received in such
reorganization, if any, are publicly traded, then this Warrant shall expire
unless exercised prior to such Transaction. In the event of any Transaction,
appropriate provision shall be made by the Company with respect to the rights
and interests of the Holder of this Warrant to the end that the provisions
hereof (including, without limitation, provisions for adjustments of the Stock
Purchase Price and of the number of shares purchasable and receivable upon the
exercise of this Warrant) shall thereafter be applicable, in relation to any
shares of stock, securities or assets thereafter deliverable upon the exercise
hereof. The Company will not effect any such consolidation, merger or sale
unless, prior to the consummation thereof, the successor corporation (if other
than the Company) resulting from such consolidation or the corporation
purchasing such assets shall assume by written instrument reasonably
satisfactory in form and substance to the Holders of a majority of the warrants
to purchase Common Stock then outstanding, executed and mailed or delivered to
the registered Holder hereof at the last address of such Holder appearing on the
books of the Company, the obligation to deliver to such Holder
3.
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such shares of stock, securities or assets as, in accordance with the foregoing
provisions, such Holder may be entitled to purchase.
3.4 CERTAIN EVENTS. If any change in the outstanding Common Stock of the
Company or any other event occurs as to which the other provisions of this
Section 3 are not strictly applicable or if strictly applicable would not fairly
protect the purchase rights of the Holder of the Warrant in accordance with such
provisions, then the Board of Directors of the Company shall make an adjustment
in the number and class of shares available under the Warrant, the Stock
Purchase Price or the application of such provisions, so as to protect such
purchase rights as aforesaid. The adjustment shall be such as will give the
Holder of the Warrant upon exercise for the same aggregate Stock Purchase Price
the total number, class and kind of shares as he would have owned had the
Warrant been exercised prior to the event and had he continued to hold such
shares until after the event requiring adjustment.
3.5 NOTICES OF CHANGE.
(a) Within 30 days after any adjustment in the number or class of
shares subject to this Warrant and of the Stock Purchase Price, the Company
shall give written notice thereof to the Holder, setting forth in reasonable
detail and certifying the calculation of such adjustment.
(b) The Company shall also give written notice to the Holder at least
10 business days prior to the date on which a Transaction shall take place.
4. ISSUE TAX. The issuance of certificates for shares of Common Stock
upon the exercise of the Warrant shall be made without charge to the Holder of
the Warrant for any issue tax (other than any applicable income taxes) in
respect thereof; provided, however, that the Company shall not be required to
pay any tax which may be payable in respect of any transfer involved in the
issuance and delivery of any certificate in a name other than that of the then
Holder of the Warrant being exercised.
5. CLOSING OF BOOKS. The Company will at no time close its transfer books
against the transfer of any warrant or of any shares of Common Stock issued or
issuable upon the exercise of any warrant in any manner which interferes with
the timely exercise of this Warrant.
6. NO VOTING OR DIVIDEND RIGHTS; LIMITATION OF LIABILITY. Nothing
contained in this Warrant shall be construed as conferring upon the Holder
hereof the right to vote or to consent or to receive notice as a stockholder of
the Company or any other matters or any rights whatsoever as a stockholder of
the Company. No dividends or interest shall be payable or accrued in respect of
this Warrant or the interest represented hereby or the shares purchasable
hereunder until, and only to the extent that, this Warrant shall have been
exercised. No provisions hereof, in the absence of affirmative action by the
holder to purchase shares of Common Stock, and no mere enumeration herein of the
rights or privileges of the holder hereof, shall give rise to any liability of
such Holder for the Stock Purchase Price or as a stockholder of the Company,
whether such liability is asserted by the Company or by its creditors.
4.
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7. REPRESENTATIONS AND WARRANTS OF THE HOLDER.
7.1 PURCHASE FOR OWN ACCOUNT. Holder represents that it is acquiring this
Warrant and the Common Stock issuable upon exercise of this Warrant
(collectively, the "Securities") solely for its own account and beneficial
interest for investment and not for sale or with a view to distribution of the
Securities or any part thereof, has no present intention of selling (in
connection with a distribution or otherwise), granting any participation in, or
otherwise distributing the same, and does not presently have reason to
anticipate a change in such intention.
7.2 INFORMATION AND SOPHISTICATION. Holder acknowledges that it has
received all the information it has requested from the Company and considers
necessary or appropriate for deciding whether to acquire this Warrant. Holder
represents that it has had an opportunity to ask questions and receive answers
from the Company regarding the terms and conditions of the offering of this
Warrant and to obtain any additional information necessary to verify the
accuracy of the information given the Holder. Holder further represents that it
has such knowledge and experience in financial and business matters that it is
capable of evaluating the merits and risk of this investment.
7.3 ABILITY TO BEAR ECONOMIC RISK. Holder acknowledges that investment in
this Warrant involves a high degree of risk, and represents that it is able,
without materially impairing its financial condition, to hold the Securities for
an indefinite period of time and to suffer a complete loss of its investment.
7.4 FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting the
representations set forth above, Holder further agrees not to make any
disposition of all or any portion of the Securities unless and until:
(a) There is then in effect a Registration Statement under the 1933
Act covering such proposed disposition and such disposition is made in
accordance with such Registration Statement; or
(b) (i) Holder shall have notified the Company of the proposed
disposition and shall have furnished the Company with a detailed statement of
the circumstances surrounding the proposed disposition, and (ii) if reasonably
requested by the Company, Holder shall have furnished the Company with an
opinion of counsel, reasonably satisfactory to the Company, that such
disposition will not require registration under the 1933 Act.
(c) Notwithstanding the provisions of paragraphs (a) and (b) above,
no such registration statement or opinion of counsel shall be necessary for a
transfer by Holder to a stockholder or partner (or retired partner) of such
Holder, or transfers by gift, will or intestate succession to any spouse or
lineal descendants or ancestors, if all transferees agree in writing to be
subject to the terms hereof to the same extent as if they were a Holder
hereunder.
8. WARRANTS TRANSFERABLE. Subject to compliance with applicable federal
and state securities laws, this Warrant and all rights hereunder are
transferable, in whole or in part, without charge to the holder hereof (except
for transfer taxes), upon surrender of this Warrant
5.
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properly endorsed. Each taker and holder of this Warrant, by taking or holding
the same, consents and agrees that this Warrant, when endorsed in blank, shall
be deemed negotiable, and that the holder hereof, when this Warrant shall have
been so endorsed, may be treated by the Company, at the Company's option, and
all other persons dealing with this Warrant as the absolute owner hereof for any
purpose and as the person entitled to exercise the rights represented by this
Warrant, or to the transfer hereof on the books of the Company any notice to the
contrary notwithstanding; but until such transfer on such books, the Company may
treat the registered owner hereof as the owner for all purposes.
9. RIGHTS AND OBLIGATIONS SURVIVE EXERCISE OF WARRANT. The rights and
obligations of the Company, of the holder of this Warrant and of the holder of
shares of Common Stock issued upon exercise of this Warrant shall survive the
exercise of this Warrant.
10. MODIFICATION AND WAIVER. This Warrant and any provision hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of the same is sought.
11. REGISTRATION RIGHTS.
11.1 Within one (1) year following the date of this Warrant (provided that
the parties may agree to file sooner to take advantage of the Company's
eligibility to use Form S-3), the Company will prepare and file with the SEC a
registration statement on Form S-3 (or such other form that the Company may be
eligible to use) relating to the sale of the shares of Common Stock issuable
upon exercise of this Warrant (the "Shares") by Holder from time to time (the
"Registration Statement"), and use its best efforts, subject to receipt of
necessary information from Holder, to cause such Registration Statement to be
declared effective by the Securities and Exchange Commission (the "SEC") as soon
as practicable after the SEC has completed its review process. The Company
agrees to use its best efforts to keep such Registration Statement effective
until the earlier of (i) the date on which all the Shares have been sold by
Holder and (ii) the date on which the Shares may be resold by Holder without
registration by reason of Rule 144(k) under the Act of 1933 or any other rule of
similar effect. The Company shall file all reports required to be filed by the
Company with the SEC in a timely manner and take all other necessary action so
as to maintain such eligibility for the use of Form S-3 (or its successor or
equivalent). Notwithstanding the foregoing, following the effectiveness of the
Registration Statement, the Company may, at any time, suspend the effectiveness
of the Registration Statement for up to no longer than 30 days, as appropriate
(a "Suspension Period"), by giving notice to the Holder, if the Company shall
have determined that the Company may be required to disclose any material
corporate development. The Company will use its best efforts to minimize the
length of any Suspension Period. Notwithstanding the foregoing, no more than two
Suspension Periods may occur in any twelve (12) month period. Holder agrees
that, upon receipt of any notice from the Company of a Suspension Period, Holder
will not sell any Shares pursuant to the Registration Statement until (i) Holder
is advised in writing by the Company that the use of the applicable prospectus
may be resumed, (ii) Holder has received copies of any additional or
supplemental or amended prospectus, if applicable, and (iii) Holder has received
copies of any additional or supplemental filings which are incorporated or
deemed to be incorporated by reference in such prospectus. Holder further
covenants to notify the Company promptly of the sale of all of its Shares.
6.
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11.2 The Company shall furnish to Holder promptly after the Registration
Statement is prepared and publicly distributed, filed with the SEC, or received
by the Company, one copy of the Registration Statement and any amendment
thereto, each preliminary prospectus and prospectus and each amendment or
supplement thereto. The Company shall furnish to Holder such number of copies of
prospectuses and preliminary prospectuses in conformity with the requirements of
the Securities Act, in order to facilitate the public sale or other disposition
of all or any of the Shares by Holder; provided, however, that the obligation of
the Company to deliver copies of prospectuses or preliminary prospectuses to the
Holder shall be subject to the receipt by the Company of reasonable assurances
from the Holder that the Holder will comply with the applicable provisions of
the Securities Act and of such other securities or blue sky laws as may be
applicable in connection with any use of such prospectuses or preliminary
prospectuses. The Company shall bear all expenses incurred by the Company in
connection with the registration of the Shares pursuant to the Registration
Statement.
11.3 The Registration Statement (including any amendments or supplements
thereto and prospectuses contained therein and, as of the dates such documents
were filed, all documents incorporated by reference therein) shall not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein, or necessary to make the statements therein not
misleading.
11.4 INDEMNIFICATION. For the purpose of this Section 11:
(i) the term "Holder/Affiliate" shall include Holder and any
affiliate of Holder;
(ii) the term "Registration Statement" shall include any final
prospectus, exhibit, supplement or amendment included in or relating to the
Registration Statement referred to in Section 11.1.
(a) The Company agrees to indemnify and hold harmless Holder and
each person, if any, who controls Holder within the meaning of the Securities
Act, against any losses, claims, damages, liabilities or expenses to which
Holder or such controlling person may become subject, under the Securities Act,
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any
other federal or state statutory law or regulation, or at common law or
otherwise (including in settlement of any litigation, if such settlement is
effected with the written consent of the Company), insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof as
contemplated below) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement, including the prospectus, financial statements and schedules, and all
other documents filed as a part thereof or incorporated by reference therein, as
amended at the time of effectiveness of the Registration Statement, including
any information deemed to be a part thereof as of the time of effectiveness
pursuant to paragraph (b) of Rule 430A, or pursuant to Rule 434, of the Rules
and Regulations, or the prospectus, in the form first filed with the SEC
pursuant to Rule 424(b) of the Regulations, or filed as part of the Registration
Statement at the time of effectiveness if no Rule 424(b) filing is required (the
"Prospectus"), or any amendment or supplement thereto, or arise out of or are
based upon the omission or alleged omission to state in any of them a material
fact required to be stated therein or necessary to make the statements in any of
them not misleading, and will reimburse Holder and each such controlling person
for any
7.
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legal and other expenses as such expenses are reasonably incurred by Holder or
such controlling person in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage, liability, expense or
action; provided, however, that the Company will not be liable in any such case
to the extent that any such loss, claim, damage, liability or expense arises out
of or is based upon an untrue statement or alleged untrue statement or omission
or alleged omission made in the Registration Statement, the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with written
information furnished to the Company (i) by or on behalf of Holder expressly for
use therein or (ii) the failure of Holder to comply with the covenants and
agreements contained in this Warrant respecting the sale of the Shares, the
inaccuracy of any representations made by Holder herein or any statement or
omission in any Prospectus that is corrected in any subsequent Prospectus that
was delivered to Holder prior to the pertinent sale or sales by Holder. In
addition to its other obligations under this paragraph (a), the Company agrees
that, as an interim measure during the pendency of any claim, action,
investigation, inquiry or other proceeding arising out of or based upon any
statement or omission, or any alleged statement or omission, or any inaccuracy
in the representations and warranties of the Company in this Agreement or
failure to perform its obligations in this Agreement, all as described in this
paragraph (a), it will reimburse Holder on a quarterly basis for all reasonable
legal or other expenses incurred in connection with investigating or defending
any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Company's obligation, to reimburse Holder for such
expenses and the possibility that such payments might later be held to have been
improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, Holder shall
promptly return it to the Company together with interest, compounded daily,
determined on the basis of the prime rate (or other commercial lending rate for
borrowers of the highest credit standing) announced from time to time by Bank of
America National Trust and Savings Association, San Francisco, California (the
"Prime Rate"). Any such interim reimbursement payments which are not made to a
Holder within 30 days of a request for reimbursement shall bear interest at the
Prime Rate from the date of such request. This indemnity agreement will be in
addition to any liability which the Company may otherwise have.
(b) Holder will indemnify and hold harmless the Company, each of its
directors, each of its officers who signed the Registration Statement and each
person, if any, who controls the Company within the meaning of the Securities
Act, against any losses, claims, damages, liabilities or expenses to which the
Company, each of its directors, each of its officers who signed the Registration
Statement or controlling person may become subject, under the Securities Act,
the Exchange Act, or any other federal or state statutory law or regulation, or
at common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of Holder) insofar as such
losses, claims, damages, liabilities or expenses (or actions in respect thereof
as contemplated below) arise out of or are based upon any untrue or alleged
untrue statement of any material fact contained in the Registration Statement,
the Prospectus, or any amendment or supplement thereto, or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in the Registration Statement, the Prospectus, or any amendment or supplement
thereto, in reliance upon and in conformity with written information furnished
to the
8.
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Company by or on behalf of Holder expressly for use therein, and will reimburse
the Company, each of its directors, each of its officers who signed the
Registration Statement or controlling person for any legal and other expense
reasonably incurred by the Company, each of its directors, each of its officers
who signed the Registration Statement or controlling person in connection with
investigating, defending, settling, compromising or paying any such loss, claim,
damage, liability, expense or action. In addition to its other obligations under
this paragraph (b), Holder agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other proceeding
arising out of or based upon any failure to comply, statement or omission, or
any alleged failure to comply, statement or omission, described in this
paragraph (b) which relates to written information furnished to the Company by
or on behalf of Holder, it will reimburse the Company (and, to the extent
applicable, each officer, director or controlling person) on a quarterly basis
for all reasonable legal or other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of Holder's obligations to reimburse the
Company (and, to the extent applicable, each officer, director or controlling
person) for such expenses and the possibility that such payments might later be
held to have been improper by a court of competent jurisdiction. To the extent
that any such interim reimbursement payment is so held to have been improper,
the Company (and, to the extent applicable, each officer, director or
controlling person) shall promptly return it to Holder together with interest,
compounded daily, determined on the basis of the Prime Rate. Any such interim
reimbursement payments which are not made to the Company within 30 days of a
request for reimbursement shall bear interest at the Prime Rate from the date of
such request. This indemnity agreement will be in addition to any liability
which Holder may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section 11.4 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against an indemnifying party
under this Section 11.4 notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party for
contribution or otherwise than under the indemnity agreement contained in this
Section 11.4 or to the extent it is not prejudiced as a proximate result of such
failure. In case any such action is brought against any indemnified party and
such indemnified party seeks or intends to seek indemnity from an indemnifying
party, the indemnifying party will be entitled to participate in, and, to the
extent that it may wish, jointly with all other indemnifying parties similarly
notified, to assume the defense thereof with counsel reasonably satisfactory to
such indemnified party; provided, however, if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be a conflict
between the positions of the indemnifying party and the indemnified party in
conducting the defense of any such action or that there may be legal defenses
available to it and/or other indemnified parties which are different from or
additional to those available to the indemnifying party, the indemnified party
or parties shall have the right to select separate counsel to assume such legal
defenses and to otherwise participate in the defense of such action on behalf of
such indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of its election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section 11.4 for any
legal or other expenses subsequently incurred
9.
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by such indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed such counsel in connection with the
assumption of legal defenses in accordance with the proviso to the preceding
sentence (it being understood, however, that the indemnifying party shall not be
liable for the expenses of more than one separate counsel, approved by such
indemnifying party in the case of paragraph (a), representing the indemnified
parties who are parties to such action) or (ii) the indemnified party shall not
have employed counsel reasonably satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of action, in each of which cases the fees and expenses of counsel
shall be at the expense of the indemnifying party.
(d) If the indemnification provided for in this Section 11.4 is
required by its terms but is for any reason held to be unavailable to or
otherwise insufficient to hold harmless an indemnified party under paragraphs
(a), (b) or (c) of this Section 11.4 in respect to any losses, claims, damages,
liabilities or expenses referred to herein, then each applicable indemnifying
party shall contribute to the amount paid or payable by such indemnified party
as a result of any losses, claims, damages, liabilities or expenses referred to
herein in such proportion as is appropriate to reflect the relative fault of the
Company and Holder in connection with the statements or omissions or
inaccuracies in the representations and warranties in this Warrant which
resulted in such losses, claims, damages, liabilities or expenses, as well as
any other relevant equitable considerations. The relative fault of the Company
and Holder shall be determined by reference to, among other things, whether the
untrue or alleged statement of a material fact or the omission or alleged
omission to state a material fact or the inaccurate or the alleged inaccurate
representation and/or warranty relates to information supplied by the Company or
by Holder and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The amount paid or
payable by a party as a result of the losses, claims, damages, liabilities and
expenses referred to above shall be deemed to include, subject to the
limitations set forth in paragraph (c) of this Section 11.4 any legal or other
fees or expenses reasonably incurred by such party in connection with
investigating or defending any action or claim. The provisions set forth in
paragraph (c) of this Section 11.4 with respect to notice of commencement of any
action shall apply if a claim for contribution is to be made under this
paragraph (d); provided, however, that no additional notice shall be required
with respect to any action for which notice has been give under paragraph (c)
for purposes of indemnification. The Company and Holder agree that it would not
be just and equitable if contribution pursuant to this Section 11.4 were
determined solely by pro rata allocation (even if Holder were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to in this paragraph.
Notwithstanding the provisions of this Section 11.4, the Holder shall not be
required to contribute any amount in excess of the amount by which the amount
paid by Holder paid for the Shares that were sold pursuant to the Registration
Statement and the amount received by Holder from such sale exceeds the amount of
any damages that Holder has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
(e) It is agreed that any controversy arising out of the operation
of the interim reimbursement arrangements set forth in paragraphs (a) and (b) of
this Section 11.4,
10.
<PAGE>
including the amounts of any requested reimbursement payments and the method of
determining such amounts, shall be settled by arbitration conducted under the
provisions of the Judicial Arbitration and Mediation Service (JAMS) and shall be
held in San Diego, California. Any such arbitration must be commenced by service
of a written demand for arbitration or a written notice of intention to
arbitrate, therein electing the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of any arbitration tribunal
in such demand or notice, then the party responding to said demand or notice is
authorized to do so. Such an arbitration would be limited to the operation of
the interim reimbursement provisions contained in paragraphs (a) and (b) of this
Section 11.4 and would not resolve the ultimate propriety or enforceability of
the obligation to reimburse expenses which is created by the provisions of such
paragraphs (a) and (b).
12. NOTICES. Any notice, request or other document required or permitted
to be given or delivered to the holder hereof or the Company shall be delivered
or shall be sent by certified mail, postage prepaid, to each such holder at his
address as shown on the books of the Company or to the Company at the address
indicated therefor in the first paragraph of this Warrant or such other address
as either may from time to time provide to the other.
13. BINDING EFFECT ON SUCCESSORS. This Warrant shall be binding upon any
corporation succeeding the Company by merger, consolidation or acquisition of
all or substantially all of the Company's assets. All of the obligations of the
Company relating to the Common Stock issuable upon the exercise of this Warrant
shall survive the exercise and termination of this Warrant. All of the covenants
and agreements of the Company shall inure to the benefit of the successors and
assigns of the holder hereof.
14. DESCRIPTIVE HEADINGS AND GOVERNING LAW. The description headings of
the several sections and paragraphs of this Warrant are inserted for convenience
only and do not constitute a part of this Warrant. This Warrant shall be
construed and enforced in accordance with, and the rights of the parties shall
be governed by, the laws of the State of Delaware.
15. LOST WARRANTS. The Company represents and warrants to the Holder
hereof that upon receipt of evidence reasonably satisfactory to the Company of
the loss, theft, destruction, or mutilation of this Warrant and, in the case of
any such loss, theft or destruction, upon receipt of an indemnity reasonably
satisfactory to the Company, or in the case of any such mutilation upon
surrender and cancellation of such Warrant, the Company, at its expense, will
make and deliver a new Warrant, of like tenor, in lieu of the lost, stolen,
destroyed or mutilated Warrant.
16. FRACTIONAL SHARES. No fractional shares shall be issued upon exercise
of this Warrant. The Company shall, in lieu of issuing any fractional share, pay
the holder entitled to such fraction a sum in cash equal to such fraction
multiplied by the then effective Stock Purchase Price.
11.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by
its officers, thereunto duly authorized this 8th day of March, 1999.
HOLLIS-EDEN PHARMACEUTICALS, INC.
a Delaware corporation
By: /s/ Richard B. Hollis
-------------------------------------------
Name: Richard B. Hollis
-----------------------------------------
Title: Chairman & Chief Executive Officer
----------------------------------------
12.
<PAGE>
EXHIBIT A
SUBSCRIPTION FORM
Date: _________________, 19___
Hollis-Eden Pharmaceuticals, Inc.
9333 Genesee Avenue, Suite 110
San Diego, CA 92121
Attn: President
Ladies and Gentlemen:
The undersigned hereby elects to exercise the warrant issued to him by
Hollis-Eden Pharmaceuticals, Inc. (the "Company") and dated ___________ _____,
1999 Warrant No. W-___ (the "Warrant") and to purchase thereunder
________________________________ shares of the Common Stock of the Company (the
"Shares") at a purchase price of ___________________________________________
Dollars ($__________) per Share or an aggregate purchase price of
__________________________________ Dollars ($__________) (the "Purchase Price").
Pursuant to the terms of the Warrant the undersigned has delivered the
Purchase Price herewith in full in cash or by certified check or wire transfer.
Very truly yours,
----------------------------------------
By:
-------------------------------------
Title:
----------------------------------
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Hollis-Eden Pharmaceuticals, Inc.
San Diego, CA
We hereby consent to incorporation by reference of our report dated January 21,
2000 relating to the financial statements of Hollis-Eden Pharmaceuticals, Inc.,
incorporated by reference into the Company's Annual Report on Form 10-K for the
year ended December 31, 1999, into the prospectuses constituting a part of the
following registration statements: No. 333-18725 on Form S-8 to Form S-4,
No. 333-18725 on Form S-3 to Form S-4, No. 333-56155 on Form S-3, No. 333-56157
on Form S-3, No. 333-69725 on Form S-3, No. 333-69727 on Form S-3, No. 333-72853
on Form S-3, No. 333-92179 on Form S-3, No. 333-92185 on Form S-8, and
No. 333-96181 on Form S-3.
We also consent to the references to us under the caption "Experts" in the
Prospectuses.
BDO Seidman, LLP
New York, NY
March 17, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE TWELVE MONTH PERIOD ENDED
DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 47,486,163
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 47,628,335
<PP&E> 488,407
<DEPRECIATION> 96,538
<TOTAL-ASSETS> 48,264,871
<CURRENT-LIABILITIES> 1,640,226
<BONDS> 0
0
0
<COMMON> 110,710
<OTHER-SE> 46,513,935
<TOTAL-LIABILITY-AND-EQUITY> 48,264,871
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 17,670,703
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (15,320,037)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,320,037)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,320,037)
<EPS-BASIC> (1.41)
<EPS-DILUTED> (1.41)
</TABLE>
